Mumbai: The Indian government will have to show “commitment to fiscal consolidation and reform” in the national budget announcement later this month for the country’s rating outlook to change from negative, rating agency Fitch said in a note on Monday.
Fitch has a BBB minus rating, which is the lowest investment grade with a negative outlook. The outlook was downgraded to negative in June 2012. Fitch said that though the government has made public commitments about curbing the fiscal deficit and has taken steps to reduce subsidies on diesel and railway, “a credible medium-term fiscal consolidation plan remains key”.
“We also need to observe the impact of reform and more broadly see how India’s macroeconomic outlook develops over time. When we revised the outlook to negative from stable in June last year, we cited the risks to growth potential without faster structural reform,” Fitch said.
Finance minister P. Chidambaram has publicly said the government intends to limit the fiscal deficit to 5.3% of India’s gross domestic product in fiscal 2012-13 and reduce it further to 4.8% in 2013-14. Economists are, however, skeptical whether the government can achieve its target by reducing expenditure and raising taxes ahead of the general elections in 2014.
“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 FY14 Union budget, due at end-February, will be an important gauge of the government’s commitment to fiscal consolidation and reform in general. However, it is not the sole rating driver. A credible medium-term fiscal consolidation plan remains key,” Fitch said.