S&P in sync with new govt

New govt's policy signals are 'less alarming than initially feared', says the rating agency

Global rating agency Standard & Poor's said the new government's policy feelers were "less alarming than initially feared".

The government's ability to rein in the consolidated fiscal deficit and deepen structural reforms would be the key to any change in the sovereign ratings for India, the agency said in its commentary article "" India: Is the Shine Off "" released today.

The 2004 Budget, according to the agency, would be the litmus test for the government on the fiscal deficit front.

The Centre's fiscal deficit stands at 4.8 per cent but the consolidated fiscal deficit of the Centre and state governments is close to 10 per cent.

S&P had revised the outlook on Indian's long-term foreign currency rating from 'negative' to 'stable' in December, but left it unchanged at sub-investment 'BB' grade. There has been no change in its local currency 'BB+' rating (a 'negative' outlook) also.

The agency had found the election outcome "surprising" but "the new government's signals on policy orientation have been mixed thus far, but are less alarming than initially feared", said Standard & Poor's credit analyst Ping Chew, director in the Sovereign and International Public Finance Ratings group.

Ping was part of a two-member high-level S&P team that visited India in April ahead of the general elections.

"The uncertainties regarding the new government's policies may have a bigger effect on the fiscal deficit and on the privatisation programme than on the country's long-term growth rate," Ping said.

According to the agency, the appointment of "reforms-minded" Manmohan Singh as the Prime Minister and P Chidambaram as the finance minister had removed some uncertainties about the general direction of policies and pointed to the continuation of reforms-orientated policies.

An S&P release pointed out that the cessation or slowing of privatisation would cut off an avenue of resources. These developments might, therefore, curtail the fiscal consolidation effort, the release said.

"A concerted effort among the various levels of government to control the fiscal deficit and stabilise the government's debt burden would help the country's creditworthiness. If these efforts failed, the local currency rating could be pressured downwards.

Conversely, a better fiscal performance, along with structural reforms to maintain the country's growth prospects and its strong external profile, could lead to an improved foreign currency rating," Ping added.

Medium-term economic growth has risen, with the gross domestic product growth in 2004 likely to remain above 6 per cent, lower than last year's monsoon-driven 8 per cent.

However, the favourable macroeconomic conditions, including low inflation and a current account in near balance, could be vulnerable to a prolonged period of high oil prices or a loss of investor confidence owing to the mixed policy signals emanating from the government, the release pointed out.

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Rating show

• S&P had revised the outlook on long-term foreign currency from 'negative' to 'stable' in December.
• It had left the local currency rating unchanged at 'BB+' "" a 'negative' outlook.
• It says the government should focus on reining in the fiscal deficit.