Fitch may downgrade India’s sovereign rating if the country’s fiscal deficit worsens. Still, the global ratings agency has retained its current local and foreign currency ratings.
“If we see further slippages in the Union Budget for FY11, that will encourage us to take a ratings action," Andrew Colquhoun, director in Fitch’s Asia-Pacific Sovereign Group said.
Fitch regards the deterioration in India’s public finances since 2008 as partly structural, putting negative pressure on the local currency rating that will require substantive fiscal reform to redress, Colquhoun said.
Fitch has affirmed India’s long-term foreign and local currency ratings at ‘BBB-’, the lowest notch in investment grade. The outlook on India's foreign currency bond rating is stable, while on long-term local currency rating is negative.
The short-term foreign currency ratings at ‘F3’ also is the lowest notch investment grade rating, reflecting adequate repayment capacity.
India’s budget deficit rose in FY09 to 11.6% of GDP, from 6.4% a year earlier, on account of a combination of factors including the stimulus package of tax cuts and subsidies to contain high commodity prices, among others.
“The abandoning of the Fiscal Responsibility and Budget Management Act (FRBM 2003) leaves India without a credible fiscal framework to constrain policy and reduce its debt ratios”, Fitch said.
Colquhoun also expressed concerns about India’s low ratings in World Bank’s governance indicators and also poor physical infrastructure. “Structural reforms aimed at tackling these weaknesses would support economic prospects and strengthen the sovereign credit profile,” he said.