New Delhi/Mumbai, June 30: Standard and Poor’s (S&P) today affirmed India’s BB+ foreign currency ratings, with a negative outlook citing rising public debt. But analysts say the prepayment of bilateral debt ahead of schedule has prevented a downgrading.
Analysts said the decision to prepay debt worth Rs 7,491 crore to more than a dozen countries in the current financial year to March 2004 was factored in by the rating agency while reaffirming the rating.
The London-based rating agency, which has a tie-up with local Credit Rating Information Services of India Ltd (Crisil), affirmed the country’s short term foreign currency ratings at B; its long term local currency ratings at BB+ and its short term local currency ratings at B.
“The re-affirmation of rating hopefully has factored in the latest macroeconomic developments which includes rising rupee, large forex reserves and moderate level of inflation,” said P. K. Choudhury, chief of rating agency Icra which has a tie-up with the US-based credit rating agency, Moody’s.
S&P said the outlook is negative as the government is unable to “address fiscal and structural reforms.”
The country’s fiscal deficit for the first two months of the current financial year, April-May, stood at Rs 34,141 crore which is 22 per cent of the budgeted estimate of Rs 1,53,637 crore for the full year.
“Rising public debt, projected at about 95 per cent of gross domestic product 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 pressing issues affecting the sovereign’s credit-worthiness,” S&P said.
“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,” said an official of S&P.
S&P has also suggested measures to improve the scenario. According to S&P steps like full implementation of value-added tax and better cost recovery in public services, especially energy, could result in the outlook being revised back to stable.
Growing public debt could be reined in through aggressive tax reforms and implementation of proposed legislation to control fiscal deficits, S&P said.
The dynamism of the private sector contributes greatly to improving current account earnings and external liquidity, and should continue to thrive.
Analysts said the affirmation of rating would not have any impact on the financial markets and interest rates.
“There would be no impact on the domestic interest rate structure because there is a positive arbitrage between medium offshore rates and domestic interest rates,” said Naval Bir Kumar, managing director of Standard Chartered Mutual Fund.