Fitch Ratings, which has already downgraded outlook on India's sovereign ratings to negative, today said the Budget for 2013-14 will be an important gauge of the government's commitment to fiscal consolidation and reform in general, but not the sole rating driver. It said government policy pronouncements are positive signals to keep fiscal deficit under control and carry on with reforms, the parameters on which it judges its rating action.
"A credible medium-term fiscal consolidation plan remains key," Fich said in a statement from Singapore.
All three important global rating agencies-Fitch, Standard & Poor's (S&P) and Moody's-assigned India the lowest ratings in the investment grade. Of these, Fitch and S&P downgraded outlook on the ratings, which means that the ratings may be lowered if the situation deteriorates any further on various parameters, particularly on fiscal consolidation. However, Moody's retained the outlook as stable.
Fitch said,"We have previously said, India's patchy performance on policy implementation, and the approach of elections in 2014 could impede fiscal consolidation, suggesting political and implementation risk remain significant."
This is reflected in the Negative Outlook on India's 'BBB'-rating, the lowest rating in the investment category.
"We also need to observe the impact of reform and more broadly see how India's macroeconomic outlook develops over time," it said. Fitch said when it revised the outlook to negative from stable in June last year, it cited the risks to growth potential without faster structural reform.
It, however added that public commitments and policy announcements by the Indian government so far in 2013 are encouraging signals that the authorities want to maintain the momentum towards fiscal consolidation and structural reform generated since last summer.
"However, policy execution and the impact on trend growth will remain key to our ratings assessment," it added.
The authorities appear committed to keeping the fiscal deficit in check. Finance Minister P Chidambaram said last week that this year's and next year's deficit targets (5.3% and 4.8% of GDP respectively) are "red lines" that he will not breach.
In September and October last year, the government adjusted fuel subsidies and outlined a five-year roadmap aimed at reducing the central government fiscal deficit to 3% of GDP by 2016-2017. It had also announced that greater foreign investment participation will be allowed in some industries, including power and retail.
Since then, the authorities have also indicated they may be willing to structurally improve the fiscal position, such as raising or broadening taxes or cutting expenditures (including further subsidy reductions), the statement said.
Already this year, the government said it will let India's oil marketing companies make small increases in diesel prices. It has also increased rail fares and raised the limit on foreign investment in rupee bonds.
Furthermore, recent data shows that the authorities have made some progress in capping the FY13 budget at 5.3% of GDP as a small surplus was recorded in December. Till December of 2012-13, the Centre’s fiscal deficit touched 78.8% of the budget estimate for the entire 2012-2013, according to official figures. This is bit of improvement since in the first eight months, the percentage was 80.4%.
Fiscal deficit was projected to be 5.1% of GDP in Budget Estimate, but was later revised by the Finance Ministry to be 5.3%.