S&P affirms India's ratings

Global rating agency Standard & Poor’s today affirmed India’s long-term rating as

‘BBB-’ and short-term rating as ‘A-3’ on good prospects of economic growth and a strong external position.

The ratings are unsolicited sovereign credit ones and the outlook on the long-term rating is stable.

A positive investment trends also underpins the ratings, with foreign direct investment and portfolio investments covering a large share of the current account deficit, S&P said in a statement.

India’s weak fiscal profile and structural problems temper its strengths. The structural problems constrain efficiency and also prevent a large share of the population from reaping the benefits of the country’s rising prosperity.

The general government fiscal deficit is expected to reduce to 8.1 per cent of gross domestic product (GDP) in the financial year ending March 31, 2012, from 8.3 per cent in the previous financial year, said S&P’s credit analyst, Takahira Ogawa.

He warned despite the improvement in fiscal consolidation, high fiscal deficits and debt burdens remained the most significant negative rating factors. The consolidated debt of India’s central and state (general) governments is expected to reach 71 per cent of GDP in 2011-12.

“Interest payments will likely consume about 25 per cemt of general government revenue. Although the government has started to tackle the problem of inflated subsidies, they remain high and are prone to volatility in global commodity prices, especially that of fuel,” Crisil said.

The high inflation could also derail India’s stable macroeconomic and interest rate environment.

On steps taken by the government to improve fiscal health, S&P said, “The government intends to follow the medium-term fiscal consolidation plan outlined by the 13th Finance Commission. However, the potential risk of temporary slippages in fiscal consolidation exists, particularly if global oil prices increase significantly.”

India’s GDP growth is likely to remain strong at 8.3 per cent in 2011-12. India’s external position is also resilient. International reserves are expected to amount to $377 billion by March, 2012. This works out to 207 per cent of India’s short-term external debt (on a remaining maturity basis).