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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.

"The out 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% in 2002.

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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Note- The revision in S&P’s India outlook came 14 months after it upgraded the country’s foreign currency rating to BB+ from BB. Moody’s had, in January 2004, upgraded India’s foreign currency rating in two important categories from ‘speculative’ to ‘investment’ grade.

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Detailed comments of Standard & Poor's Upgrade of India's Outlook...Click Here

Detailed comments of Standard & Poor's Ratings of major Indian financial institutions/commercial Banks...Click Here

Detailed comments of Standard & Poor's Upgrade of India's Outlook...Click Here

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