Downgrade worries are back, Fitch says will cut rating if deficit target not met

Global ratings agency Fitch warned India of a downgrade if the country is unable to meet its fiscal deficit target, saying the fiscal numbers "look weak" and the space to contain expenditure is very limited in the second half of the financial year.

In the wake of a huge depreciation in the rupee's value and doubts over the revenue increase targets, the government has repeatedly asserted that it will be able to meet the fiscal deficit target of 4.8 per cent.

"India's fiscal numbers look weak...fiscal slippage could trigger negative rating action," Fitch Ratings' head of Asia-Pacific Sovereigns Andrew Colquhoun said on a conference call on Monday.

The current account deficit (CAD), which is being blamed as one of the primary reasons for the ongoing rupee depreciation, will come in at $75 billion in FY14 as against the $87.8 billion in the previous fiscal, Colquhoun said.

"We expect the GDP ratio for India's current account deficit to be lower than for either of the last two years," he said.

However, the ratings agency said the ongoing battle to hold rupee level may dent the country's foreign exchange reserves and added that the total reserves could fall to $230 billion from the present level of around $278 billion.

On rupee depreciation, Colquhoun clarified that Fitch does not wish to say anywhere that the ongoing troubles do not have a bearing from the credit rating perspective.

The rupee touched an all-time low of 65.56 against the US currency last week.

Reports last week had attributed Fitch as saying that the rupee fall does not warrant an immediate action on the country's rating.

"These pressures have exceeded those of other emerging Asian economies, but Fitch Ratings does not view these developments as a trigger for rating action at this point," Fitch had said in a note.

The agency's lead analyst, Art Woo, added that fiscal management is a challenging task. "The fiscal side is proving more challenging...a slowdown in fiscal expenditure in the second half of the year remains quite challenging," he said.

Last financial year, due to a pressure from international rating agencies threatening to cut the country's sovereign rating to junk status if the fiscal deficit worsens, the government had massively cut its expenditure to meet its fiscal deficit target.

The P Chidambaram-led finance ministry had in fact, bettered the targeted number by limiting the deficit to 4.89 per cent for 2012-13, as against a stated target of 5.2 per cent.

For the ongoing FY14, the government is targeting to get the fiscal deficit number to 4.8 per cent.

With inputs from PTI