April 2006 S&P raises outlook to positive Febraury. | |
| International rating agency Standard & Poor's today raised the outlook on India to positive from stable, citing improved prospects of a stable debt burden. |
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| The revision in the outlook comes 14 months after S&P upgraded India's foreign currency rating to BB+ from BB. |
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| The rating agency said it could upgrade the country's rating if it continued its efforts at fiscal consolidation, but warned it could cut the outlook if the reform agenda was derailed. |
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| "The outlook revision reflects improved prospects of a stabilising debt burden based on greater effort across all levels of the government to consolidate fiscal positions," said Standard & Poor's credit analyst Ping Chew. |
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| S&P said the central and state governments have stepped up measures to rein in budget deficits. |
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| The 2006-07 Budget puts fiscal consolidation back on track, while the assessment on state governments comes in the wake of the better-than-expected fiscal outlook. The general government deficit is expected to fall below 8 per cent of GDP in 2006 from 10 per cent in 2002. |
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| "India's economic prospects are stable and strong and we project incremental structural reform will raise GDP trend growth over 7 per cent," Chew said. |
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| The country's public finances remain among the worst of rated sovereigns, leaving it vulnerable to any secular decline in growth rates or increase in real interest rates. |
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| The general government's consolidated debt is projected to peak at 90 per cent of GDP in 2006, with interest payments consuming one-third of the general government revenue. |
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| S&P said going forward, tax measures, including expanding VAT and service tax, and tightening tax administration should result in more buoyant government revenues, especially as the highly taxed industrial sector grows more robustly and as the service sector is taxed. |
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| Coupled with operating expenditure control, more efficient spending, and implementation of fiscal responsibility laws, India should see a steady reduction of general government deficits and a falling debt burden. The country's incipient fiscal consolidation addresses its principal credit weakness. |
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| Its contingent liabilities are also high. The government-guaranteed debt alone amounts to nine per cent of 2006 GDP, and the state owned enterprises are generally inefficient. |
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| The chaos in banking during the recent strike at the State Bank of India, the country's largest commercial bank, and the unreliability of the power supply also illustrate a still-developing operating environment, including the payment system, and remaining challenges in effective administration and reforms for the labor market and public sector. |
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| "The high incidence of subsidies limits the governments' ability to spend on critical areas such as infrastructure. The debt burden has grown faster than the pace of economic growth. Strong economic growth and sustained reforms are necessary for improving the fiscal situation," Chew said. |
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