The key to India's creditworthiness will be the continued, effective and timely implementation of reforms, especially amid the vested interests of unions, public-sector managers, and political parties, S&P said.
The recent rise in domestic prices has resulted in a sharp rise in subsidies handed out by the central government. While India's official fiscal deficit position improved markedly to 2.5 per cent of the gross domestic product (GDP) in 2007-08, increased subsidies for oil, food, and fertilisers were not accounted for and are estimated to have understated the deficit by about one per cent of the GDP, S&P said.
Higher global oil prices are further pressuring the government's fiscal position, in terms of supporting India's oil-marketing public companies, leading the government to announce an increase in petroleum and diesel prices.
Although this will reduce the fiscal burden, the government has still had to issue Rs 94,600 crore (1.8 per cent of the GDP) in oil bonds. The fiscal deficit is likely to face further pressures. The rising commodity prices will lead to subsidy increases. The burden will also rise because of a recommendation from the sixth pay commission to raise the salaries of government employees.
As for inflation, the benchmark wholesale price index-based rate of inflation rose to 8.1 per cent in late May, the fastest pace since November 2004, and above the Reserve Bank of India's (RBI) target of 5.0 per cent for the fiscal year 2007-08.
RBI increased the cash reserve ratio by 25 basis points to 8.25 per cent on April 29. With fuel-price hikes, the inflation rate exceeded 11 per cent for the week ended June 7. The authorities are also grappling with signs that the economy is slowing
