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S&P raises India's foreign currency rating

By Our Special Correspondent

MUMBAI, FEB. 2. Standard & Poor's (S&P), a leading international rating agency, today raised India's foreign currency rating by one notch. This reflects India's improved external position and growth prospects. It also stated that the outlook for the country is stable.

India moved up from the sovereign rating grade of `BB' to `BB+'. However, the upgrade keeps India one notch below the investment grade.

"India's external balance sheet has strengthened markedly due to reserve accumulation and prudent debt management, which should lower the external liquidity risk from its fiscal vulnerability. As illustrated by its strengthening liquidity, India's resilient external position — stronger than all other sovereigns in the `BB' rating category — is likely to be maintained in the coming years," S&P stated.

"The strong growth in export earnings, particularly from the service and manufacturing sectors, as well as non-debt foreign capital inflows should alleviate the impact of rising imports. India's external debt and debt service burden is expected to fall in the years ahead. Total external debt is likely to fall below 90 per cent of the current account receipts for the current fiscal year ending March 31, 2005, compared with over 200 per cent in the fiscal 1993. The net public external asset position is projected to increase to over 50 per cent of current account receipts by 2005, up from almost 20 per cent in 2002," it stated.

S&P also stated that India's economic prospects are stable and good, with Gross Domestic Product (GDP) growth likely to hover at 6.5 to 7 per cent in the medium term. The service sector is dynamic, while the industrial sector is benefitting from gradual deregulation, trade liberalisation and modest improvements in infrastructure. The business environment is likely to improve in the coming years, sustaining private investment and economic growth. On expenditure term, the growth is also benefiting from higher consumption and investment demand, owing to a growing middle-income class and favourable demographics. Good economic growth could contain the pressure on India's already weak public finances. It will also attract foreign and non-resident Indian's capital to help fund the fiscal deficit.

Amid better economic conditions, the banking system's loan quality has improved, owing to structural reforms, such as the corporate debt restructuring (CDR), initiative, passing of the Securitisation Act and the establishment of asset reconstruction companies. This in turn supports higher economic growth and lowers the contingent risk on the Government's balance sheet.

Nevertheless, the principal risks on India are generated by a weak fiscal profile, especially its high deficit and serious fiscal inflexibility. India's fiscal weakness is one of the worst among rated sovereigns, leaving its particularly vulnerable to any secular decline in growth rates or increase in interest rates, it stated. The combined Central and State government deficits will amount to 10 per cent of GDP in the near term, while interest payments are likely to consume one-third of general government revenue. The consolidated debt of the Central and State governments is still expected to rise gradually for the next few years from more than 80 per cent of GDP currently.

Furthermore, India's contingent liabilities are high. Government-guaranteed debt alone amounts to 10 per cent of 2005 GDP, and the state-owned enterprises are inefficient, including the decrepit electricity sector.

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