Mumbai, April 19: Just a day after Reserve Bank governor Y.V. Reddy presented the annual policy statement where he forecast a robust GDP growth of 7.5 to 8 per cent for 2006-07, Standard & Poor’s Ratings Service (S&P) revised the country’s outlook to positive from stable.
The international credit rating agency said the revision was prompted by improved prospects for the stabilisation of the debt burden as both the Centre and state governments were making efforts to consolidate their fiscal positions.
The revision would reduce borrowing costs for Indian companies planning to raise resources abroad. This is bound to cheer companies since it comes at a time when domestic interest rates show signs of hardening.
According to Ping Chew, credit analyst, S&P, both the Centre and state governments have increased efforts to rein in their budget deficits. The central government's 2006-2007 budget puts fiscal consolidation back on track, while the assessment on state governments’ comes in the wake of better-than-expected fiscal outlook. The general government deficit is expected to fall below 8 per cent of 2006 GDP from 10 per cent in 2002.
He forecast that going forward, tax measures ' including expanding VAT and service tax ' and tightening tax administration should result in more buoyant government revenues as the highly taxed industrial sector grows more robustly and as the service sector is taxed.
“Coupled with operating expenditure control, more efficient spending, and implementation of fiscal responsibility laws, India should see a steady reduction of general government deficits and a falling debt burden,” the rating agency added.
While S&P has affirmed India's rating of BB+, which is one notch below investment grade, it pointed out that further liberalisation of the economy and infrastructure improvements will help India's growth trend.
“Such reforms coupled with continued fiscal consolidation will help India achieve investment grade over time. On the other hand, if the fiscal consolidation stalls or the reforms agenda derails, the outlook could be revised to stable,” Chew noted.
Highlighting some of the concern areas, S&P averred that India's fiscal consolidation addresses its principal credit weakness. “Public finances remain among the worst of rated sovereigns, leaving it vulnerable to any secular decline in growth rates or increase in real interest rates.
The general government's consolidated debt is projected to peak at 90 per cent of GDP in 2006, with interest payments consuming one-third of general government revenue," the agency said.
S&P feels that the chaos in the banking system during the recent strike at State Bank of India and the unreliability of power supply indicated a still-developing operating environment.
“India’s economic prospects are stable and strong and we project incremental structural reform will raise GDP trend growth over 7 per cent,” Chew said.