S&P upgrades India outlook to positive

Standard & Poor's today revised the outlook on India to positive from stable. At the same time, the BB+/B ratings on the sovereign were affirmed.

"The outlook revision reflects improved prospects of a stabilising debt burden based on greater effort across all levels of governments to consolidate fiscal positions," said Standard & Poor's credit analyst Ping Chew.

An official release issued by S&P said the central and state governments (general government) have increased efforts to rein in their budget deficits. The central government's 2006/2007 Budget puts fiscal consolidation back on track, while the assessment on state governments' comes in the wake of better-than-expected fiscal outlook. The general government deficit is expected to fall below 8.0% of 2006 GDP from 10% in 2002.

"Going forward, tax measures - including expanding VAT and service tax - and tightening tax administration should result in more buoyant government revenues, especially as the highly taxed industrial sector grows more robustly and as the service sector is taxed," the release said.

India's incipient fiscal consolidation addresses its principal credit weakness. Public finances remain among the worst of rated sovereigns, leaving it vulnerable to any secular decline in growth rates or increase in real interest rates, the release added.

"India's economic prospects are stable and strong, and we project incremental structural reform will raise GDP trend growth over 7%," Chew said.

"Further liberalisation of the economy and infrastructure improvements will help India's trend growth. Such reforms coupled with continued fiscal consolidation will help India achieve investment grade over time. On the other hand, if the fiscal consolidation stalls or the reform agenda derails, the outlook could be revised to stable," he added.