SINGAPORE (Commodity Online): Standard & Poor's Ratings Services said Wednesday that it had affirmed the 'BBB-' long-term and 'A-3' short-term unsolicited sovereign credit ratings on India. The outlook on the long-term rating is stable.

The ratings on India reflect the country's good economic growth prospects and its fairly strong external position. Positive investment trends further underpin the ratings, with foreign direct investment and portfolio investments covering a large share of the current account deficit. Nevertheless, the country's weak fiscal profile and structural problems temper its strengths. Structural problems not only constrain efficiency but also preclude a large share of the population from benefiting from the country's rising prosperity.

"We expect the general government fiscal deficit to reduce to 8.1% of GDP in the fiscal year ending March 31, 2012, from 8.3% in the previous fiscal year. Our calculations are based on our definition of government deficit, which is different from that of the Indian government," said Standard & Poor's credit analyst Takahira Ogawa. "The government intends to follow the medium-term fiscal consolidation plan outlined by the 13th Finance Commission. However, a potential risk of temporary slippages in fiscal consolidation exists, particularly if global oil prices increase significantly."

India's GDP growth is likely to remain strong at 8.3% in fiscal 2012, in our opinion. In addition, we view India's external position as resilient. Strong international reserves further support India's external position. We expect international reserves to be US$377 billion at the end of March 2012, or 207% of India's short-term external debt (on a remaining maturity basis).

"Despite the improvement in fiscal consolidation in fiscal 2010, high fiscal deficits and debt burdens remain the most significant negative rating factors. We expect the consolidated debt of India's central and state (general) governments to reach 71% of GDP in fiscal 2012," said Mr. Ogawa. "Interest payments will likely consume about 25% of general government revenue. Although the government has started to tackle the problem of inflated subsidies, these remain high and prone to the volatility in global commodity prices, especially that of fuel."

In S&P’s opinion, high inflation could derail India's stable macroeconomic and interest rate environment.

An average increase of more than 17% in the prices of primary articles in 2010, including food items, indicated that price stability in India remains vulnerable to international commodity prices and the monsoon. The Reserve Bank of India, India's central bank, has been tightening its monetary policy to curb inflation. However, the price increases are not solely cyclical. They also represent structural changes, such as India's growing middle class and the resulting shifts in diet patterns across the country. Despite the government's effort to address the logistical bottlenecks in the distribution system, it could take time to control inflation.

The transfer and convertibility assessment for India-based non-sovereign issuers remains 'BBB+', which is two notches above the long-term 'BBB-' foreign currency sovereign credit rating on India.

The stable outlook balances the country's external flexibility and prospects for gradually improving fiscal performance against inflationary pressures and political uncertainties, which may lead to higher government subsidies and stall reform efforts.

“We could raise the ratings on India if the government is able to significantly reduce general government deficits. The government could undertake several measures to reduce deficits, such as initiatives to lower and promote more efficient use of the subsidies on fuel, fertilizer, and food. These initiatives could improve the expenditure structure of the budget and reduce the negative influence of potential external shocks on India's fiscal position.” according to the S&P press release.

“The strong commitment of the central and state governments to the medium-term fiscal consolidation plan set out by the 13th Finance Commission is key to India's fiscal consolidation. The enactment of the effective "New Fiscal Responsibility and Budget Management Act" will also be important to solidify the fiscal consolidation process. Early implementation of the goods and service tax could help stabilize and potentially increase government revenues in the medium term.”, the press release observed.

Conversely, continuous loose fiscal policy or 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; concluded the release.

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