S&P ups outlook on India's ratings, high inflation a worry

However, the agency cautioned that high inflation rate of around 10 per cent could derail the “stable” macro economic and interest rate environment of India. “We revised the outlook on India to stable from negative,” S&P said in a statement from Singapore, while pegging India’s economic growth rate at eight per cent for next fiscal much in line with the government’s own projection.

S&P’s statement is in contrast to its position in  February, 2009 when it cut outlook on India’s ratings to negative from positive after the government provided stimulus to the economy hit hard by the global financial meltdown. This had raised fiscal deficit, gap between the government’s expenditure and income, to six per cent of GDP during 2008-09, whereas it should have come down to three per cent as per the roadmap mandated by the Fiscal Responsibility & Budget Management Act. Currently, India’s long term rating stands at BBB-, the lowest investment grade, and short term (up to one year) grading at A-3, which is a medium ranking. The change in outlook would result in higher faith of foreign investors in India’s investment climate, besides help Indian firms raise money from abroad at cheaper rates. Sovereign ratings reflect the ability of the government to pay back its debts.

High debt burden

S&P warned that India’s ratings were “constrained” by high government debt burden and fiscal deficit. “The consolidated debt of India’s central and state government is estimated at 80 per cent of GDP in the current fiscal, while interest payments are likely to consume about 27 per cent of general government revenue,” the agency said. S&P also sounded a word of caution for high inflation in India.

Together with sovereign (government’s) ratings, S&P also revised the outlook on ratings of six public sector undertakings—NTPC, NHPC, PFC, IIFCL, EXIM Bank and Indian Railway Finance Corp. Similarly, it also upgraded the outlook of 12 banks—Axis Bank, Bank of Baroda, Bank of India, Canara Bank, HDFC Bank, ICICI Bank, IDBI Bank, Indian Overseas Bank, Indian Bank, State Bank of India, Syndicate Bank and Union Bank of India. Backed by partial roll back of stimulus and duty hikes on petroleum products, the government has targeted lower fiscal deficit of 5.5 per cent of GDP for next fiscal from the estimated 6.7 per cent for the current fiscal.