Fitch raises India's ratings to investment grade

New Delhi, Aug 1 (UNI) Global firm Fitch Ratings today upgraded India's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'BBB-' from BB+, indicating stable outlooks.

The short-term foreign currency IDR has also been raised to 'F3' from 'B' and the country ceiling is upgraded to 'BBB-' (BBB minus) from 'BB+'.

''This upgrade reflects that fiscal consolidation is at finally 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,'' Fitch Senior Director Paul Rawkins said.

The revised data showed 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 not only played a part in this outcome but have also improved tax administration and some widening of the tax net, a Fitch statement said.

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.

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).

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.

India's structural reforms, gradual though they may appear, are starting to reap dividends with the economy been growing at close to 8.5 per cent per annum since 2003/04, notwithstanding the oil price shock.

Despite its more upbeat assessment of the country's public finances, Fitch said that growing signs that private sector borrowers are being 'crowded out', indicate that the public sector borrowing requirement is still incompatible with India's growth aspirations.

Credit growth is outstripping deposit growth, raising fears of a credit crunch which, together with rising inflation expectations, have formed the backdrop to higher interest rates since 2004.

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