Political turmoil may hit confidence, says S&P

Global rating agency Standard and Poor's today said that in the short run, the political uncertainty and a possible delay to critical reform measures could damage investor confidence and eventually have an impact on the India's growth potential.

However, medium-term growth prospects remain bright as changes in government have historically failed to deter the Indian economy from posting strong growth, S&P said in its annual "Asia-Pacific Sovereign Report Card.

The recent dispute between the Congress Party and its coalition ally, the Communist Party of India (CPI), over a U.S.-India nuclear agreement has fuelled talk of a mid-term election. This could take place in early 2008 although the present government's term doesn't end until May 2009.

The rating agency has assigned BBB-/Stable/A-3 rating to India.

The stable outlook balances India's strong external liquidity and growth prospects with its weak fiscal flexibility.

The outlook also reflects the country's ongoing efforts at fiscal consolidation, which are important to keep interest rates down and facilitate growth in the longer term.

Further improvement in rating will depends on sustained prudent fiscal policy. Such policy leads to further decline in the government debt, interest burden and reforms that lift the country's growth prospects and income levels.

By contrast, policies that reverse fiscal consolidation, weaken economic growth prospects, and erode the government's strong external liquidity position could lead to downward pressures on the rating.

On the monetary policy and management, it said the Reserve Bank of India continues to grapple with excess liquidity in the system, which could threaten its inflation target of 5 per cent this fiscal year and force domestic interest rates higher.

The central bank raised the cash reserve ratio by half a percentage point to 7 per cent in late July 2007. Inflows from the External Commercial Borrowings (ECB) route have been singled out as a source of the Indian rupee's sharp appreciation from Rs 44.5 to US dollar at the start of 2007 to Rs 39.7 per $ by early October, which is biting into the country's export competitiveness.

The government has reiterated that it can meet its 3.3 per cent and 3.0 per cent of fiscal deficit targets for fiscal years 2007"�2008 and 2008"�2009, respectively.

The focus will be on the Sixth Pay Commission's recommendations due in the first half of 2008, and their potential impact on the fiscal gains achieved so far, it said.