Deficit fall key to investment grade rating: S&P

Global rating agency Standard & Poor's today said that it would revise upward India's rating to investment grade when the country's fiscal deficit fell in absolute terms.

In a telephonic interview, Paul Coughlin, managing director (Asia) for corporate and government ratings, S&P, said: "The key issue is fiscal performance, that is, once the level of accumulated debt starts to reduce rather than increase."

S&P upgrading India's foreign currency rating to BB+ was triggered by the slowing down in the growth rate of fiscal deficit and improvement in the country's external position and growth prospects.

"Looking back over the last decade, there is a marked contrast from the time when India was on the verge of default," said Coughlin.

S&P's hesitation to upgrade the country to investment grade follows the global rating agency's apprehensions over the possibility of the domestic weakness in the system translating into the external sector.

This, said Coughlin, is despite a healthy external account. He further highlighted how internal problems could impact the external account by citing the example of the Asian crises.

India's external balance sheet has strengthened markedly, due to reserves accumulation and prudent debt management, stated S&P, which should lower the external liquidity risk from its fiscal vulnerability. Speaking on the government's decision to hike the guaranteed rate of return for provident funds under the Employees Provident Fund Organisation (EPFO), Ping Chew, director & team leader, sovereign & international public finance ratings (S&P) pointed out that this reflects the trade-off and the political compulsions facing the new government.

Retaining the EPFO rate at 9.5 per cent comes at the same time when the government was able to announce a hike in foreign direct investment in the telecom sector to 74 per cent.

"Successive governments have faced difficulty in tackling the fiscal deficit given the political compulsions. Going forward, if the government can improve the revenue base, there can still be some positive impact on the fiscal consolidation," said Chew.

Meanwhile, senior government officials today stated that India could expect a fiscal impact of Rs 26,000 crore in 2005-06 due to higher transfer of taxes to states as recommended by a government panel.

The panel has recommended that the federal government transfer 30.5 per cent of all taxes to states from the coming year, up from 29.5 per cent in the last five financial years.

While this will result in a fiscal impact close to 1 per cent of gross domestic product (GDP), the deficit is not likely to widen, the expenditure secretary, Dhirendra Swarup was quoted.

S&P is essentially looking at India's fiscal deficit, which today stands at a combined 10 per cent, and is among the highest in the region.

"Deficit is the principle risk, while other areas of concern also include slower growth, pressure on interest rates and climatic influences," said Coughlin. He also cited India's border problems with Pakistan.