Fiscal and monetary policy response to global credit crisis helped restore the economy to a path of higher growth

International credit rating agency DBRS has, for the first time, upgraded India's long-term foreign and local currency debt rating outlook to ‘stable' from BBB (low) ‘negative' on the strength of its fiscal consolidation and return to pre-crisis growth levels in the wake of a robust policy framework.

“DBRS has changed the trend on India's long-term foreign and local currency debt ratings to stable from negative. The reasons for the change are progress in fiscal consolidation in the context of a strengthening policy framework, and a return to pre-crisis growth,” the rating agency said in a statement.

Elaborating on the upgrade, DBRS, which has been rating India's debt since June 2007, lauded the government's efforts stating that there was “evidence of a stronger commitment to fiscal deficit reduction [in the] 2011-12 Budget”. “[The] government is addressing the country's infrastructure deficit by spending $514 billion or 9 per cent of gross domestic product (GDP), on infrastructure between 2007 and 2012, and an additional $1 trillion from 2013 to 2017, approximately one-half of which may come from the private sector and public-private partnerships,” DBRS said, according to a Finance Ministry statement.

It has also highlighted the possibility of the new Direct Taxes Code (DTC) contributing to improved tax efficiency and the national identification card increasing labour market formality, raising tax compliance and streamlining subsidies and social security expenditure.

“India's fiscal and monetary policy response to the global credit crisis helped restore the economy to a path of higher growth. The economy has weathered the global credit crisis relatively well, and a strong private sector-led recovery has returned India's growth rates to pre-crisis levels,” DBRS said while recognising that the country has adopted a more responsible medium-term fiscal policy and commitment to debt reduction which bodes well for the ratings.

DBRS, however, cautioned the government against the high debt ratio and the high inflationary pressure. “India's debt ratios are among the highest among developing economies,” it said.

Government debt

While the net general government debt has come down to 66.5 per cent of GDP in 2010-11, as per DBRS definition which includes transfer and subsidies, from 81.9 per cent in 2005-06, this is still among the highest among low to middle income countries.

“Furthermore, the general government deficit was a relatively high 8.3 per cent of GDP in 2010-11, food and fertiliser price subsidies are costly, and an estimated 33.9 per cent of revenues went to paying interest on debt in 2011-12,” it said.

As for inflation, currently at above 9 per cent, DBRS said the country “suffers from high inflation inertia and poorly anchored inflation expectations”.

Apart from rising international prices of commodities, DBRS sought to blame domestic pressures like high money supply growth and inefficiencies in agriculture as reasons for high inflation. “Tighter fiscal and monetary policies and, over time, better infrastructure and structural reforms should help to anchor inflation expectations,” it said.

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