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International Rating Agencies not pleased with Indian Budget 2009-10, but prefer wait & watch policy

International Rating agencies are not pleased by the projected fiscal deficit of 6.8% of GDP in Indian Union Budget FY10 as they feel it cannot be sustained. However, they feel that policy measures such as structural reforms and disinvestment of public sector companies and future efforts to reduce borrowings could improve the outlook.But they have decided to prefer wait & watch policy, before taking any decision on revising ratings.

Moody's Rating agency said that India's budget is in-line with the stable sovereign outlook. India's economic growth continues to be strong and will continue to gain from fiscal steps, it said. The rating cut is likely if India's debt sustainability worsens. India's fiscal gap is consistent with its near-term debt stability. But, the cyclical deterioration in public finances could leave the authorities ill-equipped to deal with any further external shocks (should they occur).

Standard & Poor’s (S&P) has said India’s high fiscal deficit is not sustainable in the medium term and a downgrade is likely if the government continues to spend beyond its means. At present, India has a BBB- rating with negative outlook. S&P has said, that it will await the Fiscal Responsibility and Budget Management (FRBM) part two as well as the 13th Finance Commission, which will present its report in October to check what the roadmap is for fiscal consolidation.

According to Dr Subir Gokarn, Chief Economist, Standard & Poor’s Asia Pacific- Overall, as budgets go, this one certainly scores in a realistic, house-keeping sort of way. But, the absence of a clearly articulated economic vision and strategy for the government detracts from its impact.

Future ratings from rating agencies may now depend on a combination of factors such as growth prospects in the medium term, inflation, interest rates, progress in structural reforms and capital inflows into the Indian markets.

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