S&P revises India outlook from negative to stable

Standard & Poor's Ratings Services on Thursday said that it revised the outlook on India to stable from negative. At the same time, S&P affirmed the 'BBB-' long-term and 'A-3' short-term sovereign credit ratings on India.

The following statement was released by the ratings agency

-- We expect India's fiscal position to improve over the next few years and its economy to maintain strong growth momentum.

-- We revised the outlook on India to stable from negative.

-- We affirmed the 'BBB-' long-term and 'A-3' short-term sovereign credit ratings on India.

Standard & Poor's Ratings Services today said that it revised the outlook on the Republic of India to stable from negative. At the same time, we 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 government budget targets a general government (including central and state governments) deficit of 8.3% in the fiscal year ending March 31, 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 general government deficit be reduced to 5.4% of GDP and the ratio of general government debt to GDP be lowered to 68% of GDP by the fiscal year ending 2015. The government's decision, in February 2010, to change its fertilizer policy to implement a nutrient-based pricing policy and to raise urea prices by 10% from April 2010 is a step forward for the reduction of subsidies. The budget also announced an average increase in the prices of domestic petroleum and diesel of 6.0% and 7.8% respectively.

"We expect India's GDP growth to be 8.0% in fiscal year ending March 31, 2011, which is higher than many other countries' and exceeds our previous expectation," said Standard & Poor's credit analyst Takahira Ogawa. In addition, Standard & Poor's 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.

However, the ratings continue to be constrained by the high government debt burden and deficit, and India's weak fiscal profile. The consolidated debt of India's central and state (general) governments is estimated at 80% of GDP (by our definition) in the current fiscal year, while interest payments are likely to consume about 27% of general government revenue.

"In our opinion, the recent high inflation rate could also derail the stable macroeconomic and interest rate environments," said Mr. Ogawa. The Wholesale Price Index (WPI), India's most widely used inflation index, increased by 10% in February 2010, mainly because of the rise in food prices. The stable outlook reflects our view that India's fiscal consolidation at the central, state, and public enterprise levels over the next several years will likely restore the government's policy flexibility, and keep credit fundamentals commensurate with the 'BBB-' rating. Standard & Poor's will continue to monitor the government's measures to rein in public finances.

The sovereign ratings on India could be raised, if the government continues to reduce the public sector's deficits materially. Conversely, if the government continues its loose fiscal policy or there are policy setbacks on monetary, financial, and economic fronts that lower India's medium-term growth prospects could result in a downward pressure on the ratings.

RELATED CRITERIA AND RESEARCH

"Bulletin: India's Budget Could Signal A Turning Point For Fiscal Consolidation," published Feb. 26, 2010.

"India (Republic of)," published Dec. 30, 2009.

"Sovereign Credit Rating: A Primer," published May 29, 2008.