India's growth crucial for Asia Pacific: S&P

GDP growth target lowered to 7.5-8%.

Global ratings agency Standard & Poor's has said India will be crucial for growth in the Asia-Pacific region because the second fastest-expanding economy will remain largely unaffected by the slowdown in the US.

The ratings agency, however, marginally lowered its target for GDP growth in India to 7.5-8.0 per cent from the expected 8.5 per cent in 2006. The Indian economy grew by over 9 per cent in the quarter ended September 2006.

"The economic development of Asia Pacific will continue to benefit from the three significant sub-regional economies "" China, India, and Japan "" in 2007. India continues to be crucial for regional growth," according to the 2007 Asia-Pacific Markets Outlook published by Standard & Poor's.

The report combines Standard & Poor's predictions for the equity markets, credit quality and economic performance across the region next year.

The agency said the mild slowdown in India in 2007 would be due to factors such as continuing macroeconomic stabilisation measures, tightening fiscal stance and a likely reduction in stock market returns compared with 2006.

The outlook on India's sovereign credit rating was revised to positive from stable in April 2006, highlighting that if current credit improvements continue, especially on the fiscal front, India could achieve investment grade ratings.

"The country's strong growth prospects remain a key to credit strength, and fiscal inflexibility its key credit weakness," said Ping Chew, managing director of corporate and government ratings, Asia.

"Reform efforts also remain at risk from a policy environment that is encumbered by an entrenched bureaucracy, coalition politics, and a fragmented administration," he pointed out. The overall credit quality of the Indian corporate sector is likely to remain sound in 2007.

"Indian corporates may face pressure from higher debt for funding capacity expansions, potentially weakening operating margins and from rising interest rates. But improvements in their financial profiles from strong sales growth and cash flow in the last 2-3 years will mitigate these adverse trends and lend stability to their credit profiles," said Anshukant Taneja, director and team leader of corporate ratings.

The outlook on India's banking industry is positive, according to the report. Consumer credit is the prime driver of credit expansion, growing in excess of 40 per cent each year, and now constitutes more than a quarter of the entire system's credit portfolio. Over 50 per cent of outstanding consumer credit is from inherently less-risky housing loans.

"Standard & Poor's has a favourable view of banks' increased lending to the under-penetrated consumer sector because credit losses are likely to be lower than in the corporate sector," Ritesh Maheshwari, director and team leader of financial institutions ratings, said.

The strong economic growth expected will continue to provide opportunities to banks without compromising on pricing or quality. Competition will, however, put pressure on deposit rates, as credit demand will still be enough.

Standard & Poor's expects effects of seasoning of loans acquired over the last two years to be visible in 2007 and absolute non-performing assets to rise.