Fitch Ratings has upgraded India's long-term foreign and local currency rating to investment grade, taking note of fiscal consolidation at the Centre as well as the state level. | |
| India's long-term foreign and local currency IDRs (issuer default ratings) have been upgraded to 'BBB-' from 'BB+', both with stable outlook. |
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| The short-term foreign currency IDR has been raised to 'F3' from 'B', while the country ceiling has been rated higher at 'BBB-' (BBB minus) from 'BB+'. |
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| "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; and public finances are still weak, but they are no longer an insuperable constraint on this rating," said Paul Rawkins, senior director in Fitch's Sovereign Ratings team in London. |
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| For the first time since Fitch started rating India in March 2001 there appears to be near universal commitment to fiscal consolidation among the Centre and the states. |
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| A sea change in policy intent, coupled with a more discernible path of fiscal consolidation, has reduced the risk that India's weak public finances could impair its strong external financial position. |
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| Although still high, revised data show the general government deficit declined to 7.7 per cent of GDP in 2005-06 from 10.1 per cent in 2001-02. |
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| Higher growth and lower interest rates have played a part in this outcome (to have much improved tax administration and some widening of the tax net). |
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| Modest tightening at the Centre has been matched by parallel progress among the country's 25 states and union territories, many of which have introduced value-added tax and enacted fiscal responsibility legislation over the past year. |
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| "One of the greatest contrasts between China and India is the poor quality of India's infrastructure: Indian industrialists maintain such constraints shave between 1 per cent and 2 per cent off annual GDP growth rates. Propelling India closer to sustainable double-digit growth of 10 per cent will demand greater fiscal consolidation and a renewed push on structural reforms. India needs to accelerate reforms soon if the media and market hype encapsulated in such slogans as 'India Everywhere' is to be translated into reality," said Amit Tandon, managing director, Fitch Ratings India. |
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| 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. |
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| However, the agency argues that India has long demonstrated an ability to sustain much higher debt levels than many of its rating peers. |
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| An established track record of macroeconomic stability, low inflation and a high domestic savings rate have been the key, coupled with a deep domestic capital market and external capital controls, Fitch said. |
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| 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). |
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| The agency said 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. |
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