Fitch Ratings today affirmed India's long-term foreign currency and local currency ratings at 'BB' and 'BB+', respectively. The short-term foreign currency rating is 'B'.
The rating affirmation comes close on the heels of Moody's Investors Service upgrading India's country ceiling for foreign currency debt from Ba2 to Ba1.
According to Fitch, the affirmation and stable rating outlook balances sharp improvements in India's external accounts during the past two years with an ongoing deterioration in the health of the public finances that shows little sign of being addressed in the near future.
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The agency expressed concerns about India's attempts to liberalise capital controls.
".....This sequence of events could expose India to greater shocks in the future, given the urgent need to implement fiscal consolidation and improve the health of the banking system," it said.
Coming down heavily on the widening fiscal deficit, Fitch said the deficit of 10 per cent of GDP is more representative of a 'B' than a 'BB' rated credit and is among the worst in the realm of Fitch-rated sovereigns.
"With high debt and a narrow tax base, interest payments represent 50 per cent of revenues, amongst the highest ratio seen in emerging markets.
This prevents the government from undertaking adequate capital expenditures, thereby holding down the potential growth rate of the economy," it pointed out.
Fitch has warned that that continued back-peddling on economic reforms and fiscal profligacy, resulting in sub-optimal growth and rising government debt, could lead to a downward adjustment of the local currency rating.
Unless the government begins to address fiscal problems soon, external improvements could weigh increasingly lightly in the rating balance, it said.
Fitch said that the affirmation of the sovereign ratings recognises that the government still has room to maneuver: a large domestic capital market allows it to finance most of its deficit domestically.
As outlined in the Kelkar recommendations, the revenues could be increased by expanding the tax base, minimising tax exemptions and improving tax administration. The country could use the proceeds of privatisation to retire public debt, it said.
Stating that the recent statements on the sale of the two state oil companies were encouraging, it pointed out: "However, political compulsions could make privatisation and implementation of the politically sensitive tax measures difficult given the upcoming elections in a number of states in 2003 and national elections in 2004."
Fitch said that India's external accounts have been bolstered by the country's current account surplus, a steady growth in software and merchandise exports, rising Non-resident Indian (NRI) deposits as well as a pick-up in non-debt creating foreign investment flows.
The rise in forex reserves have also reduced India's net external debt burden from 300 per cent of current external receipts in 1990-91 to around 38 per cent in 2002-2003. "However, growing prospects of a conflict with Iraq could expose India's dependence on oil imports and overseas workers' remittances from the Middle East," it said.