Fitch warns India to stick to reforms, meet fiscal targets

An employee uses an electronic machine to check an Indian currency note inside a bank in Allahabad December 16, 2011.

MUMBAI (Reuters) - India needs to commit to its recent reform measures and meet its fiscal deficit targets, Fitch Ratings said on Monday, putting further pressure on a government keen to retain investment grade ratings.

Despite praising recent policy steps and Finance Minister P. Chidambaram's assurances on deficits, Fitch said the country needed to do more, including unveiling "a credible" medium-term fiscal plan.

Fitch's warning comes after Standard & Poor's analyst Kim Eng Tan last week told Reuters the prospect that India would lose its investment-grade rating had receded somewhat as a result of economic reforms undertaken by the government.

Both Fitch and S&P had jolted markets last year by cutting the outlook on India's "BBB-minus" rating to "negative," threatening to cut the country to below investment grade, or the dreaded junk rating.

"As we have previously said, India's patchy performance on policy implementation and the approach of a general election in 2014 could impede fiscal consolidation, suggesting political and implementation risk remain significant," Fitch said in a statement.

The government is gearing up to unveil this month its budget for the fiscal year starting in April, which analysts see as a key test of commitment to shoring up finances.

Some investor fears that India would unveil a spending-heavy budget ahead of the election have eased somewhat following government measures.

These have included moves to allow diesel prices to rise and increases in rail fares, both politically unpopular moves.

India is also cutting spending, including on welfare, defence and road projects, government sources told Reuters last week, while discussing the raising of taxes.

Chidambaram has restated, during meetings with foreign investors last week, a pledge to meet a fiscal deficit target of 5.3 percent of gross domestic product for the current fiscal year and 4.8 percent for the next fiscal year.

"I don't think the finance ministry is resting easy. But this note, which has a somewhat cautious tone, is possibly another factor that they will remain concerned about," Jyotinder Kaur, economist at HDFC Bank in New Delhi, said of the Fitch statement.

"All the remarks from different rating agencies will weigh on the finance ministry's mind."

Fitch said the upcoming budget would be "an important gauge" of the commitment to fiscal consolidation, though not the only one.

"A credible medium-term fiscal consolidation plan remains key," Fitch said. "We also need to observe the impact of reform and more broadly see how India's macroeconomic outlook develops over time."

(Additional reporting by Shamik Paul; Editing by Ron Popeski)