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S&P raises India's rating outlook to positive

Global rating agency Standard and Poor's on Wednesday raised India's credit rating outlook to positive.

india Updated: Apr 19, 2006 21:44 IST

Global rating agency Standard and Poor's (S&P) on Wednesday raised India's credit rating outlook to positive from stable on greater efforts by the Central and state governments to rein in fiscal deficit.

The combined Central and state governments' deficit is expected to fall below eight per cent of the gross domestic product (GDP) in 2006 down from 10 per cent in 2002, said an S&P report.

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

The central government's budget for fiscal 2006-07 puts fiscal consolidation back on track, while the assessment on state governments comes in the wake of better-than-expected fiscal outlook, said the agency.

It said new tax measures and tightening of 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.

"Coupled with operating expenditure control, more efficient spending, and implementation of fiscal responsibility laws, India should see a steady reduction of general government deficits and a falling debt burden."

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.

S&P said India's contingent liabilities were also high. Government-guaranteed debt alone amounts to nine per cent of 2006 GDP, and the state-owned enterprises are generally inefficient, it noted.

The chaos in banking during the recent strike at the State Bank of India, the country's largest commercial bank, and the unreliability of the power supply also illustrate a still-developing operating environment.

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

India's economy is likely to expand between 7.5 per cent and eight per cent in the current fiscal year on sustained growth in farm and industrial productions, said the Reserve Bank of India (RBI) on Tuesday.

India's economy grew by a robust 8.1 per cent in the fiscal year that ended March 31, 2006, as compared to 7.5 per cent in the previous year.

"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 noted.