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Tuesday, February 24, 2009

S&P revises outlook on India to negative

Affirms 'BBB-' long-term and 'A-3' short-term sovereign credit ratings on India.

Standard & Poor's (S&P) Ratings Services, on Tuesday, 24 February 2009, revised the outlook on the long-term sovereign credit rating on the Republic of India to negative from stable. At the same time, Standard & Poor's affirmed its 'BBB-' long-term and 'A-3' short-term sovereign credit ratings on India.

The outlook revision reflects that India's fiscal position has deteriorated to a level that is unsustainable in the medium term. S&P expects general government deficit, including off-budget measures such as oil and fertilizer bonds, to increase to 11.4% in the fiscal year ending 31 March 2009, from 5.7% in 31 March 2008.

Higher global oil prices in the first half of 2008 and the global economic slowdown increased the fiscal deficit size further. With high government debt burden and deficits, its weak fiscal profile has been the single largest negative factor for the sovereign ratings on India, the S&P note added..

Among the mitigating factors, leading to India's upgrade to 'BBB-' rating in January 2007, was the commitment to fiscal consolidation by various levels of government in the country. However, the fiscal slippage highlighted in the government's interim budget announced on 26 February 2009, reverses the consolidation trend and calls into question such a commitment.

India's contingent liabilities are also high. The country's state-owned enterprises (SOEs), including the electricity sector, are generally inefficient. SOEs in oil marketing, fertilizer production, and food handling are more vulnerable to global price changes and more dependent on government financial support, S&P noted.

On the other hand, India's external position is expected to remain resilient. Despite continued dislocation of international capital markets, confidence in India is bolstered by its foreign reserves equal to 374% of short-term external debt.

Report by Capital Market

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