Pay Commission report may reverse credit rating: S&P
Global credit rating agency Standard and Poor's Ratings Services (S&P) warned on Saturday that India's credit rating, currently at BBB-/Stable/A-3, may be revised lower after the Sixth Pay Commission's report.
"The primary threat to India's fiscal consolidation efforts stems from the Sixth Pay Commission, which will make its recommendations by April 2008," S&P's credit analyst Sani Hamid said, while analysing the Budget for 2008-09 presented by Finance Minister P Chidambaram on Friday.
"Recent fiscal gains, a cornerstone of the sovereign's improved creditworthiness, could not only come under threat but be severely reversed by this pay review.
"The Budget was broadly in line with our expectations. It is largely designed to address numerous issues such as the need to maintain growth momentum, mitigate the impact of higher prices, and boost infrastructure and social spending.
"As expected, given the general election in 2009, it also contains several populist measures such as a debt waiver to small farmers.
"The government may face a multitude of challenges in the coming months that could place pressure on this Budget's fiscal-related targets," he added.
The Budget assumes a Central Government fiscal deficit of 2.5 per cent of the gross domestic product (GDP) for the current fiscal, compared with 3.1 per cent in 2007-08.
While this is better than the three per cent target set out under the Fiscal Responsibility and Budget Management (FRBM) Act 2003, the country faces a host of challenges to its fiscal outlook in the months ahead.
According to Hamid, other challenges come from potential expenditure overruns and a sharper-than-expected economic slowdown.
The latter would directly affect revenue receipts that have been the mainstay of the country's fiscal consolidation.
The economy grew at 8.7 per cent in 2007-08, from 9.4 per cent in the previous fiscal. "We expect the economy to grow 8.2-8.7 percent in 2008-09 and 7.9-8.4 per cent in 2009-10.
"India's official fiscal position is also deemed to be understated given expenditure subsidies relating to oil and food and fertilizers are accounted for off-balance sheet. Taking these into account, we estimate the general government deficit to be 6.7 per cent of GDP in 2007-08.
"A sharp increase in commodity prices has seen such subsidy-related bond issuances rise sharply," Hamid noted.
"While these expenditures are presently outside the scope of the FRBM, it is encouraging that the Budget speech acknowledges the understatement of the present fiscal deficit and the need to account for such liabilities."
The ratings on India reflect the country's strong economic prospects, solid external balance sheet and deep capital market, which support a weak but improving fiscal position, Hamid said.
"The stable outlook balances India's strong external liquidity and growth prospects with its weak fiscal flexibility, and reflects our expectation that the country will continue with efforts to consolidate its fiscal position despite the numerous challenges it faces," he added.
A reversal of the fiscal consolidation process, in tandem with deterioration in the country's balance of payments performance, could potentially put pressure on India's credit standing, he said.