Fitch raises India ratings to investment

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.