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India's rating will be undermined if poor fiscal trends continue: Duff & Phelps

Duff and Phelps Credit Rating Company said today that India's sovereign creditworthiness will be undermined if its current fiscal trends continue.

The agency expressed concern about the government's ability to meet the new fiscal deficit targets that were set in the 1999-2000 Budget. India has not met its fiscal targets for two years running.

The government used new accounting methodology to calculate the current fiscal deficit target of 4.4 per cent of GDP. Using the previous methodology and GDP series, the 1999-2000 deficit target would equal six per cent of GDP.

India's fiscal pressures intensified in 1998-99, leading to a deficit of 6.5 per cent of GDP against the government's target of 5.6 per cent. Persistently high fiscal deficits are likely to postpone the reduction of Central government debt -- more than 60 per cent of GDP in 1998-99 -- and its very high interest burden, which was 49 per cent of government revenue receipts last fiscal year.

According to the rating company, India's fiscal consolidation in 1999-2000 is expected to come from rationalisation of excise and custom taxes, a surcharge on direct taxes and privatisation receipts. The company recognises the efforts of the government to rationalise the structure of indirect taxes. However, in an economy where central government tax revenue represents approximately six per cent of GDP, expansion of the tax base will be critical for strengthening the revenue capacity of the government over the medium term, said Shelly Chaddha, assistant vice president and sovereign analyst for India.

She added that strong political support will be essential for maintaining the medium-term fiscal reform effort.

The lacklustre performance of India's exports in the last three years is another major credit concern, according to Chaddha. Slow export growth places pressure on the external accounts and adversely effects the external debt repayment capacity of India.

However, a sizable international reserve position and low short-term debt exposure should support India's external liquidity position.

The company currently rates India's foreign currency obligations at BB+ (double-B-plus) and local currency obligations at 'BBB' (triple-B). The outlook on both ratings is currently stable.

UNI

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