S&P affirms India’s long-term stable rating

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Standard & Poor’s Ratings Services affirmed its ‘BBB-’ for long-term and ‘A-3’, short-term, credit ratings on the Republic of India. The outlook on the long-term rating remains stable. This reflects the country’s strong economic prospects, external balance sheet, and its deep capital market, which supports a weak, but improving fiscal position.

India’s economic prospects remain strong, underpinned by the dynamic service sector, gradual deregulation of the industrial sector, continued trade liberalization, and modest improvements in infrastructure. Economic growth is also benefiting from higher consumption and private investment demand, due to a growing middle class and favorable demographics.

“Commitment to fiscal consolidation across all levels of government looks to be entrenched, aided by both strong revenue collection and expenditure controls,” said Takahira Ogawa, credit analyst at Standard & Poor’s. The combined central and state government deficit is estimated at 5.5% of GDP in fiscal 2007 down from 6.4% in fiscal 2006.

Improvements have been led by a marked improvement at the state government level as they implement and adhere to fiscal responsibility laws (currently enacted by 26 out of 29 state governments as of end-2007). “However, these improvements are overstated somewhat, given that the increases in subsidies for oil, food, and fertilizers--estimated to be about 1% of GDP--are not accounted for in the central government deficit,” Ogawa said.

“The ratings on India remain constrained by a weak fiscal profile, especially its high government debt burden and deficit, which are still among the largest for rated sovereigns,” he added. The consolidated debt of India’s central and state governments is projected at 78% of GDP for 2008, while interest payments are likely to consume about 30% of general government revenue. India’s contingent liabilities are also high. General government-guaranteed debt is expected to amount to almost 7% of 2008 GDP.

The stable outlook balances India’s strong external liquidity and growth prospects with its weak fiscal flexibility.