Standard and Poor's upgrades India's foreign currency rating

Wednesday, 17 December 2003, 08:00 Hrs
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NEW DELHI: Global rating agency major Standard and Poor's Tuesday raised India's long-term foreign currency rating to "stable" from "negative to stable" in view of the country's improving external finances.

The agency, however, retained the negative outlook on the country's local currency rating because of what it said was the government's continuing difficulty in addressing fiscal problems and structural reforms.

"Rapidly increasing external liquidity, sustained by growing foreign exchange reserves, and modest debt service payments sparked the revision in the foreign currency outlook," said Takahira Ogawa, credit analyst with Standard and Poor's.

India's stable and good economic prospects was another factor supporting the sovereign ratings, said the agency.

The Indian government has projected a seven percent economic growth in the fiscal year ending March 31, 2004, up from a moderate 4.3 percent in the previous year following a severe drought in some parts of the country.

Standard and Poor's said India was expected to achieve a five to six percent economic growth in the medium term and this should help cushion the impact of its high fiscal deficit.

"Nevertheless, rising public debt and increasing fiscal inflexibility remain the most pressing issues for the government," said Ogawa, noting the government must accelerate progress in structural reform.

"Resistance from vested interests, including bureaucrats and politicians, has hindered government efforts to reduce restrictions such as land ownership and labour markets," he said.

In addition, continued over-protection of small-scale industries had lowered the country's growth prospects to the current level, said the agency.

"Although deregulation and privatisation are slowly taking place, public sector reform has not yet started," said Standard and Poor's rating review report.

"Annual borrowing by the state and central governments and their enterprises equal almost the entire financial savings of the country.

"A growing share of public spending is diverted to meet interest payments and salaries for a bloated civil service. As a result, public investment declined to only six percent of gross domestic product from 10 percent a decade ago."

Ogawa said, "The outlook on India's local currency ratings could be revised to stable if the government manages to reverse its fiscal trajectory by reducing the deficit and accelerating structural reform.

"This would also improve prospects for the foreign currency rating."

Source: IANS
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