Fitch to review India rating amid ‘populist spending’

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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.”