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S&P links upgrade to tax reforms

Mumbai, Sept. 17: Standard and Poor's (S&P) has said it can revise its outlook on India’s sovereign rating to ‘stable’ from ‘negative’ if the government adopts certain prudent policy measures.

The Asia Pacific Sovereign Report Card of S&P advised the government to implement aggressive tax reforms and fiscal deficit control measures to restrict the rise in public debt.

“Such measures, including full implementation of value-added tax (VAT), and better cost recovery in public services, especially energy, could result in the outlook being revised to stable,” the international rating agency said.

According to the agency, the negative outlook on the country reflects the risk that the government’s debt burden may continue to rise rapidly over the medium term, especially if GDP growth decelerates.

S&P said in such a scenario, stronger political leadership on economic matters could restore policy momentum and confidence, putting GDP growth on a higher and more sustainable path.

The agency said a few positive factors about the Indian economy included comfortable external liquidity sustained by growing foreign exchange reserves and modest debt service payments.

The stable economic prospects, likely to see the country attaining a 5-6 per cent growth in the medium term, could help cushion its high fiscal deficit and contain heavy government debt burden.

However, S&P expected public finances to weaken owing largely to a “leaky tax system, low user charges for public services, and a bloated public sector”.

It added that central government revenues, which declined to 9.5 per cent of GDP in 2002 from 10.1 per cent in 1991, might not recover significantly in the coming years to fund growing spending pressures.

Listing out the negatives that constrained its ratings for the country, S&P said the consolidated direct debt of the country’s state and central governments and the debt guaranteed by them is projected at around 95 per cent of GDP this fiscal.

“The consolidated general government deficit of about 10 per cent of GDP is one of the highest of all sovereigns rated by S&P,” it noted.

S&P also said the inability of India's political class, cutting across all parties, to speed reforms was a drawback. The failure to liberalise land and labour markets, as well as restrictions that contain the production of various consumer goods in small-scale industries, constrained its macro-economic growth, it said.

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