High inflation may hurt growth: S&P

Global rating agency Standard and Poor's today said the high inflation, which breached Reserve Bank's estimate of 8.5 per cent, may hurt India's growth prospects in the medium term as it would lead to higher outgo on subsidies and other heads.

In an interview to PTI, S&P Sovereign & IPF ratings Director TK Ogawa also said it is too early to take a decision on changing India's rating as economic recovery is still at a nascent stage and uneven.

However, higher economic growth would lower the Centre's fiscal deficit from the Budget estimates of 6.8 per cent of GDP this fiscal, Ogawa added.

"There is an increasing inflation pressure, which might hinder the country's economic growth in the medium term," he told PTI.

He further said that the rising inflationary pressure could also increase the size of subsidies and the nominal cost of the funding of the government.

The government had pegged subsidies at over Rs 1.05 lakh crore, constituting over 14 per cent of around Rs 7 lakh crore non-plan expenditure in the Budget of 2009-10.

The wholesale price inflation has touched 8.56 per cent in January, surpassing RBI's estimate of 8.5 per cent by March-end.

Ogawa added that the recovery of macro economic growth of the country is still in its initial stage and the pace of recovery is uneven.

"At this stage its too early for us to talk about the level of the downward pressure on the sovereign ratings of India," Ogawa said.

However, India's fiscal deficit may be lower than the estimated 6.8 per cent  for the current fiscal on the back of high growth, he added.

"There is a possibility that the actual turn out of the central governments fiscal deficits are lower than budgeted 6.8 per cent of GDP because of the higher than expected pace of the macro economic growth," he added.

In February last year, S&P downgraded outlook on India's long term sovereign rating from stable to negative, which means the existing rating may be downgraded in future due to burgeoning fiscal deficit.

S&P's India sovereign credit rating currently stands at 'BBB-', three notches down from the highest grade.

Impacted by the global economic crisis, the government came out with three stimulus packages, which include steps like slashing excise duty by six per cent and service tax by two per cent, besides raising public expenditure.

This fuelled economic growth to stunning 7.9 per cent in the second quarter of this fiscal from 6.1 per cent in the previous quarter and 5.8 per cent each in the previous two quarters.

However, this also led to raising the fiscal deficit to 6.2 per cent of GDP during 2008-09 from mere 2.5 per cent estimated in the Budget. This fiscal, it is projected to widen to 6.8 per cent.