Standard & Poor’s (S&P) Ratings Services today said that it revised the outlook on India to stable from negative. At the same time, we affirmed the ‘BBB-‘ long-term and ‘A-3′ short-term sovereign credit ratings on India.

The revision in outlook reflects our view that India’s fiscal position could now begin to recover and that its economy will remain on a strong growth path. The government budget targets a general government (including central and state governments) deficit of 8.3 per cent in the fiscal year ending March 31, 2011, from 9.8 per cent in the previous fiscal year.

The government intends to follow the medium-term fiscal consolidation plan outlined by the 13th Finance Commission. The Commission recommended that general government deficit be reduced to 5.4 per cent of GDP and the ratio of general government debt to GDP be lowered to 68 per cent of GDP by the fiscal year ending 2015. The government’s decision, in February 2010, to change its fertilizer policy to implement a nutrient-based pricing policy and to raise urea prices by 10 per cent from April 2010 is a step forward for the reduction of subsidies. The budget also announced an average increase in the prices of domestic petroleum and diesel of 6.0 per cent and 7.8 per cent, respectively.

“We expect India’s GDP growth to be 8.0 per cent in fiscal year ending March 31, 2011, which is higher than many other countries’ and exceeds our previous expectation,” said S&P’s Credit Analyst Takahira Ogawa. In addition, S&P’s views India’s external position as resilient. We expect the country’s ratio of gross external financing need to current account receipts plus international reserves to remain stable at 77 per cent in fiscal 2010.

However, the ratings continue to be constrained by the high government debt burden and deficit, and India’s weak fiscal profile. The consolidated debt of India’s central and state (general) governments is estimated at 80 per cent of GDP (by our definition) in the current fiscal year, while interest payments are likely to consume about 27 per cent of general government revenue.

“In our opinion, the recent high inflation rate could also derail the stable macroeconomic and interest rate environments,” said Ogawa. The Wholesale Price Index (WPI), India’s most widely used inflation index, increased by 10 per cent in February 2010, mainly because of the rise in food prices. The stable outlook reflects our view that India’s fiscal consolidation at the central, state, and public enterprise levels over the next several years will likely restore the government’s policy flexibility, and keep credit fundamentals commensurate with the ‘BBB-‘ rating. S&P will continue to monitor the government’s measures to rein in public finances.

The sovereign ratings on India could be raised, if the government continues to reduce the public sector’s deficits materially. Conversely, if the government continues its loose fiscal policy or there are policy setbacks on monetary, financial, and economic fronts that lower India’s medium-term growth prospects could result in a downward pressure on the ratings.

source: Business Standard

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