New Delhi: Credit rating agency Fitch Inc. on Monday retained India’s long-term sovereign rating on both domestic and foreign currencies at BBB, but stuck to a negative outlook on the country’s long-term domestic currency rating, partly due to its high fiscal deficit.

Graphic: Yogesh Kumar / Mint

Between 2007-08 and budget estimates of 2009-10, India’s fiscal deficit worsened from 2.7% to 6.8% of gross domestic product, in the wake of an economic slowdown.

“Fitch regards the deterioration in India’s public finances since 2008 as partly structural, putting negative pressure on the local currency rating that will require substantive fiscal reform to redress," Andrew Colquhoun, a director in Fitch’s Asia-Pacific Sovereign Group, said in a statement.

“A part of the fiscal deficit issue is structural, which needs to get addressed in a more comprehensive manner, especially in petroleum," said Shubhada Rao, chief economist at Yes Bank Ltd.

The subsidy bills in fertilizers and refined petroleum products are linked to the fluctuations in international crude oil and petrochemical prices. End-user prices of these products tend to be sticky, while the extent of subsidy bill and the attendant impact on public finances move in tandem with global prices.

According to Fitch’s statement, India would need substantive fiscal reforms to offset the weaknesses that showed up in the current fiscal to 31 March. The agency has identified the report of the 13th Finance Commission (TFC) as a crucial milestone in getting a measure of India’s fiscal reform.

TFC is a statutory body which typically recommends a formula to bifurcate tax revenues between Centre and states. In addition to taxes, the TFC was asked to suggest a road map for fiscal reform. Its report, which was submitted to President Pratibha Patil on 30 December, is expected to be made public later this month.