Fitch affirms India's ratings

After Moody's Investors services, it is the turn of another rating agency to analyse and decide on India's ratings. This time it is the turn of Fitch Ratings Limited, an international rating agency with HQs at London and New York. This rating agency has taken note of the increasing foreign exchange reserves in India's coffers. In its latest rating exercise, the agency had affirmed India's long term foreign currency ratings at 'BB'. In case of local currency, the rating is a 'BB+' The short term foreign currency rating is 'B'.

The agency has expressed concern "at the deterioration in the health of the public finances that shows little sign of being addressed in the near future."  
The rating agency states that India's international liquidity position has improved drastically. It states that India's international reserves (excluding gold) increased by about US$ 18 billion during March 2002 and January 2003.

 This helped in reducing India's net external debt burden. This burden decreased to a low of 38% in 2002/03 as against 300% (of current external receipts) in 1990/1991. The agency cautions about the affect of a possible Iraq conflict on India's oil imports and on remittances from NRIs in the Middle East.  

Fitch also expresses serious concern at the lack of interest shown by government towards improving the health of Indian banking system and the deterioration of public finances. Fitch states that there is an urgent need to implement fiscal consolidation. Fitch states "With high debt and a narrow tax base, interest payments represent 50% of revenues, amongst the highest ratio seen in emerging markets. 

This prevents the government from undertaking adequate capital expenditures, thereby holding down the potential growth rate of the economy. Sizeable primary fiscal deficits and a narrowing gap between GDP growth and interest rates on government debt have seen general government debt continue to climb - it is expected to reach nearly 80% of GDP by end 2002/03."

While expressing concern, Fitch also accepts that India has a large domestic capital market that provides the government enough room to finance its deficit domestically. Fitch also acknowledges the government's aggressive privatization (in the form of sale of PSU shares).

Fitch also warns "continued back peddling on economic reforms and fiscal profligacy resulting in sub-optimal growth and rising government debt could lead to a downward adjustment of the local currency rating. Moreover, unless the government begins to address fiscal problems soon, external improvements could weigh increasingly lightly in the rating balance."