S&P raises India outlook

No change in ratings.

Standard & Poor's today raised its outlook on India's long-term foreign currency as well as local currency ratings. There is no change in the ratings.

The outlook on BB long-term foreign currency rating was raised from stable to positive, while that of BB+ long-term local currency rating from negative to stable.

The global rating agency also affirmed all existing ratings. At BB, the long-term foreign currency rating continues to be sub-investment grade.

"India's foreign currency rating can be upgraded, provided the domestic debt burden moderates. On the other hand, if the fiscal deficit remains large and the debt burden continues to rise, the local currency rating can be lowered," S&P credit analyst Ping Chew, director in the Sovereign & International Public Finance Ratings Group, said in a media release.

In December last year, S&P had revised the outlook on the long-term foreign currency rating from negative to stable but left the grade unchanged at BB.

Moody's, another global rating agency, had upgraded India's foreign currency bonds and the government's foreign currency issuer rating to investment grade, Baa3, from Ba1 in January this year. The outlook for both ratings is stable.

"The outlook revisions reflect India's improving external liquidity and better prospects for the government's debt burden to stabilise," said Chew.

According to him, India's robust foreign exchange reserves, which exceed 2,000 per cent of short-term debt, mitigate the risk of volatility in external confidence.

At the same time, Chew pointed out that the sovereign ratings remained constrained by high public debt and serious fiscal inflexibility.

"The country's fiscal weakness is the worst among rated sovereigns, leaving it particularly vulnerable to economic cycles and a decline in the growth rate," he said. The sovereign ratings are supported by good economic prospects, with an over 6 per cent GDP growth in the medium-term.

The services sector was dynamic, while the industrial sector was benefiting from gradual deregulation, trade liberalisation and modest improvements in infrastructure, the S&P release said.

"Good economic growth could contain the pressure on India's already weak public finances, provided tax reform continued," pointed out Chew. The total external debt is likely to fall below 100 per cent of current account receipts for the current fiscal year, compared with over 200 per cent in 1993-94. The fall is on account of strong export growth and non-debt foreign capital inflow, which should help offset the impact of rising imports given the surge in oil prices.

S&P expects the consolidated debt of the central and state governments to hover around 80 per cent of the GDP in 2004-05.

The combined Central and state government deficits amount to 9-10 per cent of GDP, while interest payments are likely to consume one-third of general government revenue in the current fiscal year.

Moreover, the country's contingent liabilities are high with the government-guaranteed debt amounting to 10-11per cent of 2004 GDP.

Although the Centre had stepped up its efforts to rein in the Budget deficit, the pace of budgetary consolidation was likely to be slow, the S&P release said.

The agency described the government's commitment to adhere to the Fiscal Responsibility and Budget Management Act 2003 -- which targets a gradual reduction of the budget deficit -- as "noteworthy coming from a generally left-leaning government, reflecting a bipartisan support for fiscal consolidation".

The release also said tax reforms and implementation of the value-added tax, could result in more buoyant government revenues.

"Cautious debt management, deepening domestic capital markets, and rising private sector savings should continue to cushion the macro-economic impact of large fiscal deficits," it added.