Fitch keeps India ratings, govt finances in focus

HONG KONG/MUMBAI - Fitch Ratings affirmed India's ratings on Monday but kept its negative outlook on the local currency rating, saying public finances will deteriorate due to a weakening economy and government stimulus measures.

The economy is expected to expand at 7.1 percent in the current year ending this March, the slowest pace in six years, boosting expectations of fresh government stimulus measures.

Whether India maintains its current ratings will depend on the budget enacted for its fiscal year ended in 2010, and whether the government can improve its public finances, Fitch said.

Fitch affirmed India's foreign currency issuer default ratings at BBB-minus, or the lowest investment-grade level, with a stable outlook. Local currency ratings were also kept at that rating, but with a negative outlook.

The local currency rating outlook was lowered last July on worries about deteriorating public finances and is above Moody's rating, which marks it a speculative grade.

"Fiscal conditions are likely to continue to deteriorate as the economy weakens and as the central government responds with both tax and expenditure measures," James McCormack, head of Asia Sovereign ratings, said in the statement when explaining the differing outlooks for both ratings.

Indian authorities have rolled out two stimulus packages so far in addition to aggressive rate cuts and throwing credit lines to real estate companies and the export sector to shield the economy from the effects of the global credit crisis.

Additional spending proposed by lawmakers totaled 3 trillion rupees ($61.2 billion) and was 40 percent higher than initially budgeted estimates, Citigroup analysts said in a recent note.

"It is essential that a credible medium-term fiscal strategy is enacted," McCormack added, noting the government would need to resume the improvement in public finances that were seen in the fiscal 2004-2008 years.

Fitch forecast India's general government deficit will reach 9.5 percent of gross domestic product in its current fiscal year ending in 2009, up from 6.1 percent in the previous year. The agency includes oil and fertiliser bonds in its estimates.

This is sharply higher than a central bank projection of around 7 percent of GDP and an estimate of 8 percent of GDP by an economic advisory council to the prime minister.

Government debt will reach 77.9 percent of GDP, Fitch also said, calling both these levels "outliers" among sovereign countries rated at the BBB level.