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Standard & Poor's Ratings Services on Upgrade of India's Outlook
"Rapidly increasing external liquidity, sustained by
growing foreign exchange reserves (exceeding 700% of short-term debt), and
modest debt service payments sparked the revision in the foreign currency
outlook," said Standard & Poor's Ratings Services. Foreign exchange reserves
should equal about 490% of India's gross external financing gap (current
account deficit plus amortization and short-term debt) in 2003, compared
with 90% or so in similarly rated countries. This is a major supporting
factor for the sovereign ratings on India.
India's stable and good economic prospects is another factor supporting
the sovereign ratings. India is expected to achieve a 5%-6% trend rate of
GDP growth in the medium term, which should help cushion the impact of its
high fiscal deficit and restrain the rise in the government's heavy debt
burden.
"Nevertheless, rising public debt and increasing fiscal inflexibility
remain the most pressing issues for the government," according to Standard & Poor's Ratings Services. The
consolidated direct debt of India's state and central governments is
expected to be 84% of GDP in fiscal 2003, which is high for the rating
category. Moreover, this level is expected to rise steadily because of the
high consolidated general government deficit, which at more than 9% is one
of the highest of all sovereigns rated by Standard & Poor's.
The government must also accelerate progress in structural reform.
Resistance from vested interests, including bureaucrats and politicians,
has hindered government efforts to reduce restrictions such as land
ownership and labor markets. In addition, continued over-protection of
small-scale industries has lowered the country's growth prospects to
current level.
Although deregulation and privatization are slowly taking place, public
sector reform has not yet started. Annual borrowing by the state and
central governments and their enterprises equal almost the entire
financial savings of the country. A growing share of public spending is
diverted to meet interest payments and salaries for a bloated civil
service. As a result, public investment declined to only 6% of GDP, from
10% a decade ago.
"The outlook on India's local currency ratings could be revised to stable
if the government manages to reverse its fiscal trajectory by reducing the
deficit and accelerating structural reform. This would also improve
prospects for the foreign currency rating. On the other hand, if deficits
remain large and debt continues to rise, or if the government fails to
stimulate economic growth through deeper structural reform, the local
currency rating could become unsustainable. This, in
turn, could negatively affect the outlook on the foreign currency
ratings," Standard & Poor's Ratings Services added.(December 2003)
Outlook on India's 'BB' FC Rating Revised to Stable From Negative...Read More