Local issues to impact India more: S&P's

Standard and Poor's today said India was largely insulated from problems posed by the financial crisis and the slowdown in the United States, but added that it had to grapple with its own set of challenges, the chief among them being inflation.

While the economic growth is expected to slow down this year, policymakers are grappling with a more complicated situation, which could see the subsidy bill rise as the country prepares to go to polls in the next 12 months.

While the economic growth is expected to slow down this year, policymakers are grappling with a more complicated situation, which could see the subsidy bill rise as the country prepares to go to polls in the next 12 months.

Along with the award of the recommendations of the sixth Pay Commission, the fiscal deficit, which the rating agency said was understated, could be under pressure.

"A reversal of the fiscal consolidation process in tandem with a deterioration in the country's balance of payments performance could potentially put pressure on India's credit standing," an S&P report said.

At the end of March, inflation based on the Wholesale Price Index was estimated at a 40-month high of 7.41 per cent.

The economy is expected to grow 8.7 per cent in 2007-08 and the fiscal deficit is budgeted to drop from 3.1 per cent of the GDP last year to 2.5 per cent in 2008-09.

"The ratings on India (BBB-table/A-3) currently reflect the country's strong economic prospects, solid external balance sheet and deep capital market, which support a weak but improving fiscal position. The key to credit will be the continued implementation of reforms in an effective and timely manner, especially amid vested interest of unions, public sector managers and political parties," it added.

While India will remain largely insulated from the developments in the US due to its position as one of the least internationally integrated economies in Asia, a host of other countries will be affected.

S&P's said there might be an end to a five-year run of emerging market sovereign upgrades exceeding downgrades. "We forecast that for 27 of the 42 sovereigns, growth will slow from 2007 to 2009," said the agency's credit analyst John B Chambers, the chairman of the Sovereign Ratings Committee.

"The general government balances of 21 will deteriorate between 2007 and 2009. On the other hand, fiscal and external debt dynamics for most emerging market sovereigns will not worsen, according to our near-term forecasts," he said.