News: 'India could get upgrade if finances improves'

(RTR 14/12/2006) Mumbai - International rating agency Standard & Poor's (S&P) said on Thursday that India's credit rating could be upgraded to investment grade if it continued to improve its public finances.

"The outlook on the sovereign credit rating on India was revised to positive from stable in 2006, highlighting that if current credit improvements continue, especially on the fiscal front, India could achieve investment grade ratings," S&P said in its Asia Pacific Market Outlook for 2007.

Fitch Ratings and Moody's Investors Service both rate India's foreign debt at investment grade, but S&P assigns a rating just below that at "BB+".

The government cut the fiscal deficit to 4.1 percent of gross domestic product (GDP) in the fiscal year that ended in March 2006 last year from 5.9 percent in 2002/03.

The deficit is expected to fall to 3.8 percent of GDP this fiscal year as strong economic growth lifts net revenues, and the government wants to cut it to 3 percent by 2008/09.

S&P there was a risk to this outlook from a review of pay for government employees. A panel is due to submit its report in 18 months.

"Judging from the impact that the previous fifth pay commission had on both the centre and state finances, this could throw the steady fiscal progress into disarray," S&P said.

A similar pay panel in 1997 raised salaries for federal employees by nearly 40 percent and sparked off demands from states and other state-run company workers for wage increases.

S&P said that while the macroeconomic view was favourable for Indian stocks, the deficit could pose a risk.

"Some potential risk lies in the government deficit which has thus far been offset by a positive capital account, through foreign investment inflows," S&P said.