Duff & Phelps Rates India Investment Grade

Duff & Phelps Credit Rating Co (DCR) has given India an investment grade rating of BBB minus. This is DCRs first sovereign credit rating for India.

India is currently rated investment grade by Moodys and a notch below investment grade by Standard & Poors.

DCRs rating reflects the Chicago-based agencys belief that India is strongly committed to establishing a competitive and creditworthy economy.

The rating was further supported by strong economic growth since 1993, falling inflation, an improvement in the balance-of-payments accounts, an unblemished debt service record and an improving trend in external debt indicators.

However, DCR has pointed out that the high fiscal deficits, infrastructure bottlenecks, slow progress in disinvestment of state-owned enterprises and high income inequality constrained the rating, even as frequent political changes discomfited foreign investors.

 

Although the political changes did not result in a shift in economic policy, DCR notes a recent slowing in the pace of reforms.

If this continues, it could be a cause for concern as important issues such as tackling the oil pool deficit, setting up the Insurance Regulatory Authority, etc, could be further delayed, the agency warned.

DCRs rating gives India credit for steadily implementing liberalisation policies.

An era of liberalised industrial policies combined with financial sector reforms has contributed to a healthier macroeconomic performance, says the agency.

Indias trade and balance of payments improved substantially since the initiation of the reform process, DCR notes.

The current account deficit declined from 3.2 per cent of GDP to 0.5 per cent in 1993-94, before widening to 1.4 per cent in 1996-97, reflecting a recovery in growth rates.

Although the export growth rate declined in 1996, after averaging 20 per cent for the previous three years, DCR expects a pick-up in world trade in 1997 to have a beneficial impact.

DCR also believes FDI will continue to have a larger share in financing the current account deficit. FDI increased from less than $100 million in 1990 to $2.2 billion in 1996-97.

At the same time, international reserves grew to $22.4 billion in March this year, reflecting large capital inflows, and giving the Reserve Bank greater flexibility in case of future pressure on the currency.

However, DCR also notes that Indias the external debt burden remains relatively high 284 per cent of the exports in 1995-96.

Debt service is expected to increase gradually as the country starts paying market rates on a higher proportion of its debt.

Commenting on the relative lack of progress in reining in fiscal deficits, DCR notes that tight expenditure control efficient targeting and phasing out of subsidies is essential to reach the target of a 3.5 per cent fiscal deficit by year 2000.

The credit rating agency also notes that although disinvestment has yet to gather momentum, there is a large potential of privatisation receipts that could be realised in the future.