Mumbai: Fitch Ratings today upgraded its ratings for India's Long-term foreign and local currency debt to 'BBB-' (BBB minus) from 'BB+', both with 'stable outlooks'. The short-term foreign currency IDR is also raised to 'F3' from 'B' and the country ceiling is upgraded to 'BBB-' (BBB minus) from 'BB+'.
"This upgrade reflects Fitch's view that fiscal consolidation is at last taking hold in India, reinforced by the impressive growth story. India's external strengths have looked comfortably low investment grade for a while; public finances are still weak, but they are no longer an insuperable constraint on this rating," says Paul Rawkins, senior director in Fitch's Sovereign team in London.
Fitch says that for the first time since it started rating India in March 2001, there appears to be near universal commitment among the centre and the states to fiscal consolidation. This sea change in policy intent, coupled with a more discernable path of fiscal consolidation, has reduced the risk that India's weak public finances could impair its strong external financial position.
Although still high, revised data show the general government deficit declining to 7.7 per cent in 2005-06 from 10.1 per cent of GDP in fiscal year 2001-02. Higher growth and lower interest rates have played a part in this outcome but so, too, have much improved tax administration and some widening of the tax net. Modest tightening at the centre has been matched by parallel progress among India's 25 states and union territories, many of which have introduced value-added tax and enacted fiscal responsibility legislation over the past year.
Fitch acknowledges that, at 84 per cent of GDP, the public debt ratio remains far above the 'BBB' median (34 per cent) and has been slow to respond to higher growth. However, the agency argues that India has long demonstrated an ability to sustain much higher debt levels than many of its rating peers. An established track record of macroeconomic stability, low inflation and a high domestic savings rate has been the key, coupled with a deep domestic capital market and external capital controls, says Fitch.
An important by-product of the government's heavy reliance on the domestic debt market to fund its borrowing requirement has been the build-up of a net public external creditor position well ahead of the 'BBB' median (12 per cent of current external receipts). The agency says this, plus an unblemished debt service record, in contrast to many of its rating peers, represent important sovereign rating attributes weighing strongly in the balance against India's weak public finance ratios.
Fitch says India's structural reforms, gradual though they may appear, are starting to reap dividends: the economy has been growing at close to 8.5 per cent per annum since 2003-04, notwithstanding the oil price shock, an earlier precursor of which brought the economy to its knees in the early 1990s. While noting that higher oil prices have taken their toll of inflation and the balance of payments, the agency says that neither are the constraints that they once were on growth. India is expected to encounter little difficulty in financing a larger current account deficit of 2.4 per cent of GDP in 2006-07: the gross external financing requirement is estimated at just 18 per cent of reserves, well below the 'BBB' median of 74 per cent, underlining the fact that $155 billion of international reserves buys significant insurance against external shocks.
Despite its more upbeat assessment of the country's public finances, Fitch says that growing signs that private sector borrowers are being 'crowded out' indicate that the public sector borrowing requirement is still incompatible with India's growth aspirations. Credit growth is outstripping deposit growth, raising fears of a credit crunch, which, together with rising inflation expectations, have formed the backdrop to higher interest rates since 2004.
"India's ability to sustain growth of 8 per cent and more will be an important factor in the evolution of its sovereign ratings and one that is likely to demand greater fiscal consolidation and a renewed push on structural adjustment," added Rawkins.
Amit Tandon, MD, Fitch Rating India says that despite changes in the government, the direction of reforms has more or less remained the same in the last 12 to 15 years. Going forward, Tandon thinks that fiscal consolidation will be the main focus of this rating. CNBC-TV18 shares with domain-b its exclusive interview with Tandon:
Your upgrade comes just a day after Delhi announced that the fiscal deficit for the first quarter was already 52 per cent of the full year's target, you aren't very concerned by that?
As always the sovereign ratings do present a conundrum, the country's external balance is comfortable and it fits in fairly well with the rating category.
The public finance ratios on the other hand are not well. They are closer to those of speculative grade, although there are some important mitigating factors that have come into the play including India's ability to sustain higher levels of public debts than its peers without ever having the defaulted in the past.
We were able to strike an appropriate balance between these two ends and assign the ratings.
This rating that you have come up about, how much of the work was done before the announcement of yesterday and would it play a part at all, did it influence you at all while coming to this rating or was this done before the numbers come out?
The review is like all the ratings review. Reviews are an ongoing process. But we have had meetings about eight-ten weeks back when the sovereign team had come and visited the various participants including the ministry of finance and the government of India and did speak to a lot of corporates, investors, policy bodies, and the industry associations before they reached at a decision.
What is it that you have raised India's ratings from?
They were stepped up from BB+. Both the foreign currency and the local currency ratings were at BB+.
Give us one word on the structural reforms that you have touched upon as well, which one in specific stood out for you and caused this upgrade?
In India, you see a gradual approach to reform. One of the things, which had an impact on the rating committee, was that despite the four government changes in the last twelve-fifteen years, there seems to be an overall commitment to reform.
It is just the overriding commitment, which we have seen across the political spectrum to reforms. The nuances might change in between. We have the coalition government and that in itself means that the decision taking is not as cohesive as you would like it to be. But the important thing is the direction of the change.
Going ahead what might be the key indicator for you to maintain this rating?
Fiscal consolidation will remain the main focus of this rating, particularly in the context of such strong growth as well as for a renewed fresh push on the structural adjustment.
How do you explain your comfort with the fiscal consolidation?
The record is not perfect. There are some of budget activities, which continued to flatter the numbers. But the Central government now seems much more focused on realizing the medium-term targets, which have a caused let down in the fiscal responsibility.
So you are convinced by the direction of the thinking of the government in this regard?
That is right. We also draw comfort from the fact that many state governments have embraced the fiscal consolidation in the past year and are holding out better prospects in recent times.
Which companies do you think will benefit from this upgrade?
We are reviewing it at the moment. But a few of the people, who would benefit from these, would be those whose ratings are very clearly linked with the sovereign or constrained by the sovereign ratings. This announcement just has been made; the rating committees would have a look at it.
You had long experience as a banker, so for which company you are finding it easier to go out and raise money?
If you look at two-investment grade ratings, it is always better than one-investment grade ratings. So, two investment grade ratings should mean that some of the better-rated corporates in India should be able to access a wider investor base.
Will that in turn have an impact on interest rates domestically?
It is a bit too early to comment on that but I think that it should be by and large positive. But one needs to weigh that against the trend of overall increasing interest rates. So, I guess that it will provide some count