Fitch to review India rating amid ‘populist spending’

Agencies, Banking Bureau
Posted: 2008-06-07 23:36:52+05:30 IST
Updated: Jun 07, 2008 at 2336 hrs IST

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Mumbai, Jun 6: Fitch Ratings said it will review India's debt rating in the third quarter as the nation's budget deficit widens because of “populist spending” by the government. “There are really contentious issues India is struggling with,” James McCormack, head of Asian sovereign ratings at Fitch, said in Mumbai today. “We also have to assess why the fiscal picture is getting worse.”

Fitch raised India's local-currency debt rating in August 2006 by one level to BBB-, the lowest investment grade, citing economic growth and improved government finances. Record-high oil prices have increased the cost of subsidies as the government kept fuel prices below market rates to make them affordable to the poor. It also waived about $17 bn of loans owed by farmers.

The “fiscal situation is worse than anticipated,” Fitch said, adding it has “some tolerance for India's fiscal slippage.” The Finance Minister seeks to narrow the budget deficit to 2.5 % of gross domestic product in the year to March 31, from 3.1% in the previous year. The deficit in the year ended March 2008 reached 90.4 %, or Rs 1.3 lakh crore, of the annual target, the government said on May 30.

“When we think of India's rating, definitely the fiscal situation is a constraint,” McCormack said. “At the level of investment grade where India is, fiscal issues are important. India stands out already as having a weak fiscal position relative to its peers.”

Fitch ratings which also came out with a report on the banking sector highlighting that retail non-performing loans (NPLs) particularly in unsecured consumer lending have started rising. “While there has been a significant improvement in the asset quality, but NPL ratios could now start inching up. A few banks have discontinued small ticket personal loans and are re-working loss assumptions on credit cards. A severe fall in property prices – although unlikely – could affect the banks’ residential (13% of loans) and commercial property lending (4% of loans) portfolio,” said Ambreesh Srivastava and Charlene Chu, senior directors of financial institutions, Asia from Fitch ratings. However, NPL ratios will mostly rise from their historic lows but not to alarming levels, they added. Talking about bank credit, Fitch highlighted that with the Reserve Bank of India taking several steps like raising cash reserve requirements, risk-weightings and general provision on “risky” asset classes, growth in bank credit has now moderated.

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