The Hindu Business Line : S&P revises outlook on India to `positive'

The change in the outlook on the country may be followed by a revision in the sovereign rating in the future, the agency indicated. This could help Indian corporates raise foreign loans at lower cost.

"The outlook revision reflects improved prospects of a stabilising debt burden based on greater effort across all levels of governments to consolidate their fiscal positions," said S&P's credit analyst Mr Ping Chew.

S&P said that the central and state governments have increased efforts to rein in their budget deficits. The 2006-07 Union Budget puts fiscal consolidation back on track, while the assessment on state governments comes in the wake of better-than-expected fiscal outlook.

The government deficit is expected to fall below 8 per cent of GDP from 10 per cent in 2002.

Going forward, tax measures, including expanding VAT and service tax, and tightening tax administration should result in more buoyant government revenues, especially as the highly taxed industrial sector grows more robustly and as the service sector is taxed.

"India's economic prospects are stable and strong and we project incremental structural reform will raise GDP trend growth over 7 per cent," Mr Chew said. "Further liberalisation of the economy and infrastructure improvements will help India's trend growth. 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 reform agenda derails, the outlook could be revised to stable," he noted.

Mr A.C. Mahajan, Executive Director, Bank of Baroda, said the revised outlook proves that the economic turnaround in India is being recognised as sustainable growth, and not merely a bubble. While this may not have much impact internally, it will help Indian corporates in accessing foreign funds. He said, "Even if an Indian corporate is strong internally, the country's rating was a constraint and overseas funds were expensive. Now, with the improved outlook, Indian firms would be able to raise cheaper funds abroad."

S&P said that India's contingent liabilities are also high. The Government-guaranteed debt alone amounts to 9 per cent of 2006 GDP, and State-owned enterprises are generally inefficient. The chaos in banking operations during the recent strike at the State Bank of India, the country's largest commercial bank, and the unreliability of power supply also illustrate a still-developing operating environment, including the payment system, and the challenges remaining in effective administration and reforms for the labour market and public sector.

Moody's Investors Service has placed India's sovereign at Baa3, or the lowest investment grade.

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