Fitch sees credible fiscal consolidation in Budget

International rating agency, Fitch Ratings, today said it expects India's 2005-06 Budget to implement a credible fiscal consolidation process to hasten its graduation to investment grade rating.

"Fitch believes that the debt could start to rise again in the absence of tighter fiscal policy, as the interest rate cycle is on an upturn," Shelly Shetty, senior director in Fitch's sovereign group said.

Among the factors Fitch will be looking for in the forthcoming budget would be a more aggressive pace of fiscal consolidation than that implied by the Fiscal Responsibility and Budget Management Act.

Fitch wants a broadening of the tax basein line with the recommendations of the Kelkar committee, implementation of a state-level value-added tax scheme, the phasing out of subsidies and renewed impetus on privatisation and liberalisation of the foreign investment climate.

The rating agency said this is not the time for the government to become complacent, with the general government deficit consistently exceeding 9 per cent of GDP and general government debt rising to over 80 per cent of GDP.

A weak revenue base lies at the root of India's fiscal woes. The tax structure is complicated, riddled with loop holes and heavily skewed towards the industrial sector, while other key sectors remain very lightly taxed. Services, which accounts for almost 50 per cent of GDP and is currently the fastest growing sector, generates less than 5 per cent of total tax revenue.

The rating agency believes that the Indian economy's new found resilience to shocks such as higher oil prices owes much to the positive impact of past reforms. Fitch warned that India's ability to grow at 7-8 per cent on a sustained basis will remain in doubt for as long as the public sector fails to put its financial house in order.