Budget won't be the sole ratings driver, says Fitch

Last Updated: Tue, Feb 05, 2013 05:33 hrs

Fitch Ratings, which had earlier downgraded the outlook on India's sovereign ratings to negative, on Monday said though Budget 2013-14 would be an important gauge of the government's commitment to fiscal consolidation and reforms, it wouldn't be the sole driver of ratings. It said the government's policy announcements were positive signals that fiscal deficit would be under control and the government would go ahead with reforms, the parameters for its ratings.

Global rating agencies Fitch, Standard & Poor's (S&P) and Moody's had assigned India the lowest rating in their investment grades. Fitch and S&P had downgraded the outlook on the ratings, which meant the rating might be lowered if the scenario, particularly on fiscal consolidation, deteriorated. However, Moody's retained a stable' outlook on India.

"A credible medium-term fiscal consolidation plan remains the key," Fitch said in a statement from Singapore. "We have previously said India's patchy performance on policy implementation and the approach of elections in 2014 could impede fiscal consolidation, suggesting political and implementation risks remained significant," it said. This was reflected in the negative outlook on India's BBB- rating, the lowest in the investment category.

"We also need to observe the impact of reforms and more broadly see how India's macroeconomic outlook develops over time," it said, adding when it had revised the outlook from stable to negative in June, it had cited risks to growth without faster structural reform.

Fitch said policy announcements by the Indian government so far this year were encouraging signals authorities wanted to maintain the momentum towards fiscal consolidation and structural reform generated last summer. "However, policy execution and the impact on trend growth would remain the key to our ratings assessment," it said. Last week, Finance Minister P Chidambaram had said the fiscal deficit targets for this year and the next (5.3 per cent and 4.8 per cent of gross domestic product, respectively) were "red lines" that he wouldn't breach.

In September and October, the government had adjusted fuel subsidies and drafted a five-year road map to reduce the Centre's fiscal deficit to three per cent of GDP by 2016-17. It had also said greater foreign investment participation would be allowed in a few segments, including power and retail. Since then, authorities had indicated they might structurally improve the fiscal position through raising or broadening taxes or cutting expenditures, including subsidy reductions, Fitch said.

This year, the government said it would let oil marketing companies increase diesel prices, albeit in small doses. It has also increased railway fares and raised the cap on foreign investment in rupee bonds.

Meanwhile, data shows progress in restricting FY13 fiscal deficit at 5.3 per cent of GDP. Till December, the Centre's fiscal deficit for 2012-13 touched 78.8 per cent of the Budget estimate, according to official figures. In the first eight months, it stood at 80.4 per cent.

Budget 2012-13 had estimated fiscal deficit at 5.1 per cent of GDP. The finance ministry later revised this to 5.3 per cent.

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