Standard & Poor's Outlook On India Revised To Positive On Improved Budgetary Prospects; Ratings Affirmed
Standard & Poor's Ratings
Services on April 19, 2006, revised the outlook on India to positive from stable. At the
same time, the 'BB+/B' ratings on the sovereign were affirmed.
look revision reflects improved prospects of a stabilizing debt
burden based on greater effort across all levels of governments to consolidate
their fiscal positions," said Standard & Poor's credit analyst Ping Chew.
The central and state governments (general government) have increased
efforts to rein in their budget deficits. The central government's 2006/2007
Budget puts fiscal consolidation back on track, while the assessment on state
governments' comes in the wake of better-than-expected fiscal outlook. The
general government deficit is expected to fall below 8.0% of 2006 GDP from 10%
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. 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.
India's incipient fiscal consolidation addresses its principal credit
weakness. 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. The general government's consolidated debt is projected to
peak at 90% of GDP in 2006, with interest payments consuming one-third of
general government revenue.
India's contingent liabilities are also high. Government-guaranteed debt
alone amounts to 9% of 2006 GDP, and the state-owned enterprises are generally
inefficient. 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.
"India's economic prospects are stable and strong and we project
incremental structural reform will raise GDP trend growth over 7%," Mr. Chew
said. "Further liberalization of the economy and infrastructure improvements
will help India's trend growth. Such reforms coupled with continued fiscal
consolidation will help India achieve investment grade over time. On the other
hand, if the fiscal consolidation stalls or the reform agenda derails, the
outlook could be revised to stable," he noted.
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