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India's fiscal policies may not result in rating cut: Fitch

business Updated: May 10, 2009 10:44 IST

With the next government expected to take measures to give a fillip to slowing economy, global rating agency Fitch on Sunday said expansionary fiscal policies by India to battle downturn may not necessarily lead it to cut its ratings.

"There are counter-cyclical aspects to the expansionary fiscal position that may not necessarily result in a negative rating action," Fitch Head of Asia-Pacific Sovereign Ratings James McCormack told PTI.

The statement assumes significance in the wake of another global rating agency Standard and Poor's downgrading outlook of India's long term credit rating in February on rising fiscal deficit.

McCormack said it is important to remember that fiscal policy is now being considered in the context of global economic slowdown.

Fitch will certainly consider the fiscal policies undertaken by the new government to take a call on reviewing the rating, since public finance pressures were among the primary considerations when the country's local credit rating was placed on negative outlook last year, he added.

Last year, Fitch had cut the outlook to "negative" due to considerable deterioration in the central government's fiscal position, combined with a notable increase in government debt issuance to finance off-budget subsidies.

"Fitch will be focussed more on India's structural fiscal position, and whether the new government intends to restore public finances to a more sustainable path on the medium term," McCormack said.

He said, the agency is waiting for the upcoming report of the 13th Finance Commission to identify structural fiscal priorities.

"These will be very important in assessing the medium-term fiscal outlook," it added.

Finance Minister Pranab Mukherjee in his interim Budget speech said that the Finance Commission has been asked to lay down the roadmap for fiscal consolidation.

Fitch said fiscal position is the most significant negative factor from a rating perspective, but the economy is clearly facing other challenges.

Most notably, slower economic growth is proving a challenge, along with the availability of funding for the corporate sector, which had benefited from international capital flows that extended to most emerging markets.

"With the flows having stopped, access to capital may restrict growth further," he said.

India's economic growth slowed down to just 5.3 per cent in the third quarter of last fiscal, after notching more than 7.5 per cent growth in the first two quarters.

To counter the slowdown, the government has provided three stimulus packages by reducing excise duty by six per cent, service tax by two per cent among other things.

This has deteriorated the country's fiscal deficit, with the figures projected to touch six per cent in 2008-09 against earlier estimates of 2.5 per cent.

After S&P downgraded India's long term credit rating outlook, the Finance Ministry asked the agency to explain the rationale behind the downgrade, while pointing out that outlook for other nations which had seen soaring fiscal deficit were left unchanged.