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7-8% growth doubtful without check on fiscal deficit: Fitch “India’s ability to grow at 7-8% on a sustained basis will remain in doubt for as long as public sector fails to put its financial house in order,” Fitch senior director Shelly Shetty said in a statement.
“The weak state of public finances represents the single most important constraint on its sovereign ratings,” she said.
“A weak revenue base lies at the root of India’s fiscal woes. The tax structure is complicated, riddled with loopholes and heavily skewed towards the industrial sector, while other key sectors remain very lightly taxed,” she said, adding “implementation of a credible fiscal consolidation process would hasten India’s graduation to investment grade.”
Services, which account for almost 50% of GDP and are currently the fastest growing sector, generate less than 5% of total tax revenue, she said.
Fitch currently rates both India’s long-term foreign currency and local currency sovereign debt issues at ‘BB+’ with a stable outlook. Short-term rating is ‘B’.
With rebound in economy and low interest rates, it said market concerns about public debt sustainability have receded.
However, it said “this is not time for government to become complacent as public finances have deteriorated since the mid-1990s, with government deficit consistently exceeding 9% of GDP and government debt rising to over 80% of GDP. Such indicators remain far above ‘BB’ and ‘BBB’ rating medians.”
Among the factors that Fitch will be looking for in the forthcoming Budget are - a more aggressive pace of fiscal consolidation than that implied by the Fiscal Responsibility and Budget Management Act, a broadening of the tax base in line with the recommendations of the Kelkar committee, implementation of a state-level VAT scheme, phasing out of subsidies, and renewed impetus on privatisation and the liberalisation of the foreign investment climate.
Moreover, with the upturn of the interest cycle, Fitch said the debt could start to rise again in the absence of tighter fiscal policy.
The Congress-led coalition government of Manmohan Singh inherited a booming economy, it said referring to a growth close to 7% in 2004-05.
“GDP growth should remain near this level in 2005-06, which should give it the opportunity to pursue more aggressive fiscal reforms,” it said.
However, balancing the demands for greater social and capital expenditure - which it campaigned so successflly for in the last election - against pressures for much needed fiscal consolidation will be a difficult challenge.
Fitch draws comfort from the presence of a dedicated group of proven reformists within the government, but cautions that the realities of coalition politics - Congress is heavily dependent on the outside support of some Left parties - could prevent the government from taking a more aggressive stance.
Fitch said India’s sub-investment grade sovereign ratings continue to be supported by the dramatic improvement in the country’s external balance sheet, reflecting solid export growth and an impressive build-up in international liquidity.
—PTI | ||
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