Fitch affirms India's BB+ rating

Rating agency Fitch on Thursday affirmed India's foreign and local currency ratings at 'BB+' with a stable rating outlook but said the high fiscal deficit prevented the country from achieving an investment-grade rating in the near term.

"Despite India's external strengths such as solid external liquidity and a declining external debt burden, its high fiscal deficit prevents the country from achieving an investment-grade rating in the near term," Fitch said in a release in Mumbai.

Future ratings would hinge upon the progress made by authorities to improve public finances.

"Swifter deficit reduction would place public debt on a stronger footing and encourage a virtuous cycle of lower interest rates, greater private investment and higher economic growth, all of which will be supportive of higher sovereign rating," senior director of Fitch's Soverign rating team, Shelly Shetty said.

The rating agency said the general government debt stock of over 80 per cent of GDP is significantly higher than the 'BB' median and a further build-up in public debt would undermine the ability of the government to respond to shocks.

With rapid build-up in forex reserves that reached $137 billion at the end of 2004-05, India is estimated to have turned into a net external creditor, it said.

Fitch said India's near-term growth prospects appeared to be fairly robust, a consequence of past reforms and resultant restructuring by the private sector.

Despite the fiscal weaknesses, the 2005-06 budget missed the opportunity presented by high growth to consolidate fiscal accounts faster, it said.

"The main drivers of growth will be higher consumption and infrastructure spending, and higher growth in services and industrial sectors," it said adding, sustaining seven per cent growth rate and increasing it to 8-10 per cent would depend on the ability of the government to implement structural reforms, including fiscal consolidation and further divestment, and easing of infrastructure bottlenecks.

The rating agency said that strong foreign capital inflows in recent years may partly reflect low global interest rates and it is critical for India to accelerate the reform process and deliver on higher growth to maintain its attractiveness to foreign portfolio investors.