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Stick To Reforms, Meet Fiscal Targets: Fitch Warns India

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The focus is on the Union Budget 2013.Fitch Ratings, which has already downgraded outlook on India's sovereign ratings to negative, on Monday, 4 February 2013, said the Budget for 2013-14 will be an important gauge of the government's commitment to fiscal consolidation and reform in general, but not the sole rating driver.

India needs to commit to its recent reform measures and meet its fiscal deficit targets, said Fitch, putting further pressure on a government keen to retain investment grade ratings. Despite praising recent policy steps and Finance Minister P. Chidambaram's assurances on deficits, Fitch said the country needed to do more, including unveiling "a credible" medium-term fiscal plan.

This comes at a time when India emerged as the most optimistic consumer market globally for a second straight quarter, followed by the Philippines, Indonesia and Thailand in the Nielsen Global Consumer Confidence Index.

Two months ago, on 3 December 2013, Fitch had warned that India's sovereign rating could be cut if the government loosens fiscal policy in the runup to elections due by 2014 or sees a prolonged slowdown in economic growth.
Fitch, S&P as well Moody's earlier had earlier assigned India the lowest rating in investment grade. Both Fitch and Standard & Poor's cut their ratings outlooks for Asia's third-largest economy to negative, putting the country in danger of being the first of the BRICS grouping of fast-growing economies to be downgraded to junk status. Moody's had retained the outlook as stable.

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This time, Fitch's warning comes after Standard & Poor's analyst Kim Eng Tan last week told Reuters the prospect that India would lose its investment-grade rating had receded somewhat as a result of economic reforms undertaken by the government.

India has a BBB- rating from S&P, the lowest investment grade among the BRIC group of large emerging economies and one notch above "junk" status.

Both Fitch and S&P had jolted markets last year by cutting the outlook on India's "BBB-minus" rating to "negative," threatening to cut the country to below investment grade, or the dreaded junk rating.

"As we have previously said, India's patchy performance on policy implementation and the approach of a general election in 2014 could impede fiscal consolidation, suggesting political and implementation risk remain significant," Fitch said in a statement.

The government is gearing up to unveil this month its budget for the fiscal year starting in April, which analysts see as a key test of commitment to shoring up finances.

Some investor fears that India would unveil a spending-heavy budget ahead of the election have eased somewhat following government measures.

These have included moves to allow diesel prices to rise and increases in rail fares, both politically unpopular moves.

India is also cutting spending, including on welfare, defence and road projects, government sources told Reuters last week, while discussing the raising of taxes.

Chidambaram has restated, during meetings with foreign investors last week, a pledge to meet a fiscal deficit target of 5.3 percent of gross domestic product for the current fiscal year and 4.8 percent for the next fiscal year.

"I don't think the finance ministry is resting easy. But this note, which has a somewhat cautious tone, is possibly another factor that they will remain concerned about," Jyotinder Kaur, economist at HDFC Bank in New Delhi, said of the Fitch statement.

"All the remarks from different rating agencies will weigh on the finance ministry's mind."

Fitch said the upcoming budget would be "an important gauge" of the commitment to fiscal consolidation, though not the only one.

"A credible medium-term fiscal consolidation plan remains key," Fitch said. "We also need to observe the impact of reform and more broadly see how India's macroeconomic outlook develops over time."