Global rating agency Fitch has cautioned that fiscal slippage could have negative bearing on India's sovereign rating, which is at the lowest investment grade in view of the country's weakening current account deficit and persistent inflationary pressure.
"In India and Indonesia, both BBB- (lowest investment credit rating) with stable outlook, their relatively weak starting positions with high inflation and recent rises in current account deficits suggest that their credit profiles have limited tolerance for policy slippage that saw their current account deficits and/or inflation rates stay high or rise further," it said.
Countries experiencing the greatest pressure on their currencies and reserve levels are those where weakening current account positions and persistent inflationary pressure have raised doubts over the credibility of policy management - India and Indonesia in particular, it said.
In a report titled 'Emerging Asia: slowing growth amid market pressures', Fitch sees limited scope for policy slippage for either sovereign at the current rating levels of 'BBB-' with stable outlook.
The government is taking all steps to contain fiscal deficit to 4.8 per cent of the GDP in the current fiscal year. The fiscal deficit during fiscal year 2012-13 (FY13) came down to 4.9 per cent of the GDP from 5.8 per cent the previous year.
"The government will do whatever is necessary to contain the fiscal deficit to 4.8 per cent of GDP this year. The most growth-friendly way to contain the deficit is to spend carefully, especially on subsidies that do not reach the poor, and we will take effective steps to that end," Prime Minister Manmohan Singh had said.
Finance Minister P Chidambaram at many occasions has reiterated that red line has been drawn for the fiscal deficit and they will not be breached.
With aim to stick to fiscal deficit target, the government had announced slew of austerity measures including reduction in non-plan expenditure, ban on holding seminars in five-star hotels and creation of new jobs.
As for the current account deficit, it was expected to be less than $70 billion, or 3.7 per cent of GDP, for the full fiscal year.
The current account deficit, which is the difference between inflow and outflow of foreign funds, was at 4.9 per cent of GDP in the April-June period.
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