The Hindu : S&P's India outlook negative

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Tuesday, Jul 01, 2003

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S&P's India outlook negative

By Our Staff Correspondent

MUMBAI JUNE 30. Standard & Poor's Ratings Services today affirmed its `BB/Negative/B' foreign currency and `BB+/Negative/B' local currency sovereign ratings for India. In a press release, it says, the outlook is negative reflecting continuing difficulty for the government in addressing its fiscal problems and structural reforms.

S&P said rising public debt, projected at about 95 per cent of GDP this year, and growing fiscal inflexibility from running general government deficits of about 10 per cent of GDP over the past few years are the most significant issues affecting the sovereign's creditworthiness. According to the release, "the consolidated general government deficit, of about 10 per cent of GDP, is one of the highest of all sovereigns rated by Standard & Poor's.''

The negative outlook reflects the risk that the government's debt burden may continue to rise rapidly over the medium term, especially if GDP growth were to decelerate. Further, the inability of India's political class, cutting across all parties, to re-ignite reform (particularly of the public sector) and to curb the borrowing of State and Central governments which equal almost the entire financial savings of the country, has compounded matters.

"Failure to liberalise land and labour markets, as well as restrictions that contain the production of various consumer goods to small-scale industries, constrain macroeconomic growth of the country,'' said the S&P release.

Moreover, a growing share of public spending is diverted to meet interest payments and salaries for a bloated civil service. As a result, public investment declining to only 6 per cent of GDP from 10 per cent over the past decade.

On the positive side, according to S&P, India has comfortable external liquidity sustained by growing foreign exchange reserves (exceeding 900 per cent of short-term debt), and modest debt service payments. In addition, driven by a booming private sector, the economy has stable and good economic prospects. India is likely to achieve a 5-6 per cent GDP growth in the medium term, which could help cushion its high fiscal deficit and contain the heavy government debt burden.

Also, stronger political leadership on economic matters could restore policy momentum and confidence, putting GDP growth on a higher and more sustainable path.

Aggressive tax reform and implementation of proposed legislation to control fiscal deficits could control the growth of public debt.

"Such measures including full implementation of VAT and a better cost recovery in public services, especially energy, could result in the outlook being revised back to stable,'' said the release.

In January, S&P had affirmed its `BB' foreign currency and `BB+' local currency long-term sovereign credit ratings on India, as well as its `B' short-term credit ratings.

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