India's fiscal improvements vulnerable to shocks - S&P

By Suvashree Choudhury and Neha Dasgupta

MUMBAI (Reuters) - India's hard-won fiscal improvements could fail to withstand an external shock, rating agency Standard and Poor's warned on Monday, given "less than rock solid" public finances that remain a concern for its sovereign rating profile.

"While the country's budgetary performances have strengthened in recent years, its hard-won fiscal improvements could yet unwind because of a financial or commodity shock," the rating agency said in a report, citing the need to pay out costly subsidies and interest on government debt.

The rating agency lauded India's efforts to increase capital expenditure by more than 25 percent in 2015/16, versus an average rise of 5.4 percent since 2011/12.

But it expressed concern that the spending plan could also be hit if India failed to raise the amount targeted from the sale of stakes in state-run firms.

"Particularly if divestment targets are also not met, the government could find it necessary to cut capital spending again to meet its deficit target," S&P said.

The government has a fiscal deficit target of 3.9 percent of gross domestic product for the current fiscal year, and has projected divestment of 695 billion rupees ($11.1 billion) to help reach it, but many analysts see this income level as ambitious.

India, constrained by a modest average income level and the government's weak fiscal position, has a BBB- rating from S&P, with a "stable" outlook.

Last week, Moody's raised India's outlook to "positive", bringing the country a step closer to a rating upgrade. Fitch reaffirmed its BBB-, "stable" outlook.

Major rating agencies give India the lowest investment grade rating. [ID:nL4N0X61EL]

The Narendra Modi government, which took power last May promising faster growth and more jobs, has been moving to fast-track infrastructure projects and remove policy uncertainty, as well as cut fuel subsidies.

"Together with the resulting better growth prospects, these potential developments could also bring about stronger credit support for the government," S&P said.

($1=62.4700 rupees)

(Reporting by Suvashree Dey Choudhury and Neha Dasgupta; Editing by Clara Ferreira Marques and Clarence Fernandez)