Gross fiscal deficit to touch 9.5%, says Fitch

Gross fiscal deficit to touch 9.5%, says Fitch
Business Standard, February 10, 2009, Section II, Page 3

Reaffirms local, foreign currency ratings.

While reaffirming India’s currency ratings, Fitch today said that the country’s fiscal health is likely to slip further due to the economic slowdown, a slew of tax cuts and the extra spending announced by the government to boost demand.

It affirmed the country’s long-term foreign currency and local currency Issuer Default Ratings (IDRs) at ‘BB-’, or ‘investment grade’.

While retaining the ‘negative’ outlook on the local currency rating, James McCormack, head of Asia sovereign ratings at Fitch, said, “Fiscal conditions are likely to continue to deteriorate as the economy weakens and the central government response with both tax and expenditure measures.”

India’s economic growth is likely to slow down to 7.1 per cent in the current financial year ending March 2009 from 9 per cent for 2007-08, according to government estimates.

The consolidated general government deficit of the country will reach 9.5 per cent of the gross domestic product (GDP) by March 2009, up from 6.1 per cent a year ago. The deficit estimate takes into account oil and fertiliser bonds, which are “off the balance sheet” or “below the line” items, resulting in a slight increase in government debt, to 77.9 per cent of GDP.

Despite the growing fiscal imbalance, India’s external creditworthiness remains strong, supporting the ‘stable’ outlook on the foreign currency IDR, it added. India faces a modest external financing requirement compared to others in its rating group, and the country has ample external liquidity.

According to Fitch estimates, India’s current account deficit will fall to 1.2 per cent of GDP in 2009-10 from 2.9 per cent of GDP in 2008-09. The growth rates of services exports and remittance inflows are expected to decline with the advanced economies in recession. But, the effects of lower oil prices and a reduction in the growth rate of non-oil imports will be even greater.

The short-term debt on a residual maturity basis, including amortisation payments on medium-term debt obligations, will be $60 billion, well below official foreign exchange reserves (excluding gold) of $241billion.

Despite the growing fiscal imbalance, Fitch indicated that the country’s external creditworthiness remains strong, supporting the ‘stable’ outlook on the foreign currency IDR. The outlook on the foreign currency IDR and local currency IDR remained unchanged at ‘stable’ and ‘negative’, respectively.