S&P raises India's outlook; ratings left unchanged

Standard & Poor's Ratings Services said that it revised the outlook on the Republic of India to 'stable' from 'negative'. At the same time, it affirmed the 'BBB-' long-term and 'A-3' short-term sovereign credit ratings on India. "The revision in outlook reflects our view that India's fiscal position could now begin to recover and that its economy will remain on a strong growth path. The Union Budget targets a general government (including central and state governments) deficit of 8.3% in the fiscal year ending March 2011, from 9.8% in the previous fiscal year.

The Government intends to follow the medium-term fiscal consolidation plan outlined by the 13th Finance Commission. The commission recommended that government deficit be reduced to 5.4% of GDP and the ratio of government debt to GDP be lowered to 68% of GDP by the fiscal year ending 2015. The decision to change the fertilizer policy to implement a nutrient-based pricing policy and to raise urea prices by 10% from April is a step forward for the reduction of subsidies, S&P said in a statement. The Budget also announced an average increase in the prices of domestic petroleum and diesel of 6% and 7.8%, respectively.

"We expect India's GDP growth to be 8% in fiscal year ending March 2011, which is higher than many other countries' and exceeds our previous expectation," said S&P's credit analyst Takahira Ogawa. In addition, S&P views India's external position as resilient. "We expect the country's ratio of gross external financing need to current account receipts plus international reserves to remain stable at 77% in fiscal 2010," it said.

However, the ratings continue to be constrained by the high government debt burden, high fiscal deficit, and India's weak fiscal profile, according to S&P. The consolidated debt of India's central and state governments is estimated at 80% of GDP in the current fiscal year, while interest payments are likely to consume about 27% of general government revenue, it added. High inflation rate could also derail the stable macroeconomic and interest rate environments," said Ogawa.

India's sovereign ratings could be raised, if the Government continues to reduce the deficits materially, S&P said. Conversely, if the Government continues its loose fiscal policy or there are policy setbacks that lower India's medium-term growth prospects, there could be a downward pressure on the ratings, it added.