S&P, YVR say India is stable?
A reversal in fiscal consolidation and deterioration in the balance of payments situation could put pressure on India?s credit standing, said rating agency Standard & Poor?s in a report on Wednesday. India?s position as one of the least internationally integrated economies in Asia will probably help it weather the challenges posed by a slowing US economy, but the country still faces its own set of problems, the report said.
The most important among these is inflation. Wholesale price index-based inflation hit a three-year high of 7.41% for the week ended March 29. ?There are also increasing signs that the economy is slowing from its recent blistering pace, which is complicating matters for policymakers,?? pointed out the report.
Meanwhile, Reserve Bank of India (RBI) governor YV Reddy said in Washington that the turbulence in financial markets and institutions?particularly in the US?raised concerns about a possible contagion. ?The money, government securities and foreign exchange markets have been stable in India and, in our view, they may not be vulnerable in terms of direct and first-round effects,?? he said.
Indian equity markets, which often reflect global trends, have been volatile in recent months and that has some impact on changing sentiments, he explained. ?We have a bank-dominated financial sector, and banks have a strong capital base,?? Reddy added.
S&P said the country?s growth is expected to slow further this year, from 8.7% in financial year 2007-08 and 9.6% in 2006-07, which was its fastest pace in 18 years. With elections to some state legislatures expected in the next 12 months, there is an acute awareness within the government that the failure to manage rising domestic prices and an economic slowdown may bring retribution at the hustings.
The fiscal deficit is expected to face further pressure as subsidies increase with rising commodity prices and with the recommendations of the Sixth Pay Commission for an increase in salaries of government employees, said S&P.
The recent rise in domestic prices has so far resulted in a sharp increase in the amount of subsidies handed out by the central government. India?s official fiscal deficit position markedly improved to 2.5% of its gross domestic product (GDP) in fiscal 2007-08. Increases in subsidies relating to oil and food & fertilisers, which are not accounted for in the fiscal budget, however, understated the deficit by 1% of GDP, explained the S&P report.