Fitch reaffirms India’s sovereign ratings

According to the rating agency, ‘the affirmation and stable rating outlook balances sharp improvements in India’s external accounts during the past two years with an ongoing deterioration in the health of public finances that shows little signs of being addressed in the near future’.

The rise in the foreign exchange reserves has reduced the country’s net external debt burden from 300 per cent in 1990-91 to an estimated 38 per cent in 2002-03. However, the rating agency also stated that growing prospects of a conflict with Iraq could expose India’s dependence on oil imports and overseas workers’ remittances from the Middle East.

In the light of liberalisation of capital control, Fitch said it could expose India to greater shocks in the future, unless government improves its fiscal deficit position and the health of the banking sector.

“India’s public finances continue to deteriorate. At 10 per cent of GDP, the general government deficit is more representative of a ‘B’ than a ‘BB’ rated credit and is among the worst in the realm of fitch-rated sovereigns,” Fitch said while expressing concern over the poor fiscal health.

With high debt and a narrow tax base, interest payments represent 50 per cent of revenues, amongst the highest ratio seen in emerging markets. This prevents the government from undertaking adequate capital expenditures, thereby holding down 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 per cent of GDP by the end of 2002-03. In addition, if India were to embark on an aggressive privatisation drive, it could apply these proceeds to retire public debt. Recent positive statements regarding the sale of the two state oil companies, which had earlier been stymied by political intervention, were encouraging.

However, political compulsions could make privatisation and implementation of the politically sensitive tax measures difficult, given the upcoming elections in a number of States in 2003 and Union elections in 2004.