Fitch Ratings, the international rating agency, has outlined some of the measures
it will be looking for in India's forthcoming budget on February 28, 2005.
Shelly Shetty, senior director in Fitch's sovereign group, says, "The
weak state of India's public finances represents the single most important
constraint on its sovereign ratings: implementation of a credible fiscal consolidation
process would hasten India's graduation to investment grade".
foreign currency and local currency sovereign debt issues at 'BB+' with a
- The short-term
foreign currency rating is 'B'.
notes that with the rebound in economic activity and low interest rates, market
concerns about public debt sustainability have receded. However, the agency
says that this is not time for the government to become complacent: public
finances have deteriorated since the mid-1990s, with the general government
deficit consistently exceeding 9 per cent of GDP and general government debt
rising to over 80 per cent of GDP.
indicators remain far above 'BB' and 'BBB' rating medians. Moreover, with
the upturn of the interest cycle, Fitch believes that the debt could start
to rise again in the absence of tighter fiscal policy. Shetty says "A
weak revenue base lies at the root of India's fiscal woes.
tax structure is complicated, riddled with loop holes and heavily skewed towards
the industrial sector, while other key sectors remain very lightly taxed."
Thus, services, which account for almost 50 per cent of GDP and are currently
the fastest growing sector of the economy, generate less than 5 per cent of
total tax revenue.
outlook notes that Dr Manmohan Singh inherited a booming economy growth
is expected to come in at close to 7 per cent in 2004-05 and should remain
near this level in 2005-06 which should give it the opportunity to
pursue more aggressive fiscal reforms. However, balancing the demands for
greater social and capital expenditure on which the Congress party campaigned
to power during the last general elections, against pressures for much needed
fiscal consolidation, will be a difficult challenge.
the factors that Fitch will be looking for in the forthcoming budget will
more aggressive pace of fiscal consolidation than that implied by the Fiscal
Responsibility and Budget Management Act;
- A broadening
of the tax base in line with the recommendations of the Kelkar committee;
of a state-level VAT scheme;
out of subsidies and;
impetus on privatisation and the liberalisation of the foreign investment
draws comfort from the presence of a dedicated group of proven reformists
within the government, but cautions that the realities of coalition politics
the Congress is heavily dependent on the outside support of "some
left-wing parties" could prevent the government from taking a
more aggressive stance.
says India's sub-investment grade sovereign ratings continue to be supported
by the dramatic improvement in the country's external balance sheet, reflecting
solid export growth and an impressive build-up in international liquidity.
the current account has slid into modest deficit, this has been more than
offset by capital inflows (chiefly non-debt creating) and international reserves
rose to $125 billion at the end of January. 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.
in the IT sectors and the infrastructure and consumer sectors, coupled with
trade liberalisation and the restructuring of the corporate sector, may herald
an increase in India's potential GDP growth rate. However, Fitch warns that
India's ability to grow at 7-8%
on a sustained basis will remain in doubt for as long as the public sector
fails to put its financial house in order.