Fitch Affirms India’s Ratings with Stable Outlook

2 November 2007: Fitch Ratings has affirmed the Republic of India’s Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘BBB-’ (BBB minus) with a Stable Outlook. Fitch has also affirmed the Country Ceiling at ‘BBB-’ (BBB minus) and the Shortterm Foreign Currency Rating at ‘F3’.

“Fitch upgraded India to investment grade in August 2006. One year on, the growth story remains firmly intact, reinforced by strong net capital inflows and further advances in India’s external solvency and liquidity indicators. Fiscal consolidation, too, has continued to move ahead, narrowing the gulf between India and many of its rating peers,” says Paul Rawkins, Senior Director in Fitch’s Sovereigns team. Tighter monetary policy has succeeded in reducing inflation to about 3% and curbing the rate of domestic credit expansion, but externally driven pressures on liquidity and rapidly escalating asset prices continue to pose challenges.

Fitch says that rules-based fiscal policy is bearing fruit in India; moreover, in a rare display of common purpose, the states now seem to be on the point of upstaging the central government. On current trends, India’s general government deficit is set to fall to 5.6% of GDP in the fiscal year ending March 2008, compared with 10% of GDP as recently as 2001-2002. India therefore appears to have taken some decisive steps toward entrenching fiscal discipline. Nevertheless, Fitch notes that the track record is still short, while a proliferation of off-budget items – chiefly fuel and fertiliser subsidies and losses of state utilities – means that the consolidated deficit is understated by about 2% of GDP. Such factors, coupled with the costs of soaking up domestic liquidity associated with large balance of payments surpluses, help explain why India’s general government debt/GDP ratio – at 78% more than double the ‘BBB’ median – has declined less rapidly than a narrowing primary budget balance and robust GDP growth of more than 9% might imply.

Fitch argues that India remains a rank outsider on most fiscal measures, underlining the distance it needs to make up compared with its peers. Strong growth will be critical, but so too will be faster reform. In the short term, the electoral timetable points to reform stalemate: a general election must be held by May 2009 (and may be earlier). Fiscal consolidation will need to remain at the forefront, however, if the government of the day is to make progress on the provision of basic infrastructure, banking sector reform and further opening up of the balance of payments capital account. Fitch says that progress in these areas, coupled with a renewed push in such areas as privatisation, labour market reform and the ease of doing business will remain the focus of future sovereign rating reviews.

Fitch notes that one of the most striking developments since the turn of the century has been the steep rise in India’s gross domestic savings and investment ratios, which speaks to both the sustainability of growth and India’s ability to support high levels of public debt. Comparable increases in savings and investment have served to contain the current account deficit to 1%-2% of GDP, notwithstanding a doubling in the value of oil imports since FY04-FY05. Net capital inflows – chiefly foreign direct and portfolio equity investment – have been more than sufficient to fund these deficits, and international reserves have continued to climb to more than USD260bn, undiminished by the turmoil in global credit markets. Although sudden reversals in portfolio equity inflows cannot be ruled out, Fitch judges this risk to be manageable in the context of India’s comfortable reserve position. Moreover, with increments in reserves outstripping increases in external public debt, Fitch now ranks India as one of the strongest public net external creditors in the ‘BBB’ range, alongside Russia and Kazakhstan.

(This is the press release of Fitch Ratings)

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