India still vulnerable: S038;P

Global rating firm Standard Poor8217;s has described the Indian economy as stable but still vulnerable to the global slowdown.

Global rating firm Standard 038; Poor8217;s has described the Indian economy as stable but still vulnerable to the global slowdown. A reversal in fiscal consolidation and deterioration in the balance of payments situation can put pressure on the country8217;s credit standing. India8217;s position as one of the least internationally integrated economies in Asia is likely to help it weather the challenges posed by a slowing US economy, but the country still faces its own set of problems, the S038;P report said. The most important among these is inflation.

8220;There are increasing signs that the economy is slowing from its recent blistering pace, which is complicating matters for policymakers,8221; the report pointed out. S038;P said the country8217;s growth rate is expected to slow further this year from 8.7 per cent in fiscal 2007-2008 and 9.6 per cent in fiscal year 2006-2007, the fastest pace in 18 years. With elections to some state legislatures expected in the next one year, there is an acute awareness within the government that any failure to manage rising domestic prices and an economic slowdown may result in reverses at the hustings.

The fiscal deficit is expected to face further pressure as subsidies increase with rising commodity prices and with the 6th Pay Commission recommendations for an increase in government employees8217;s salaries, S038;P warned. The recent rise in domestic prices has so far resulted in a sharp rise in the amount of subsidies handed out by the Central government. India8217;s official fiscal deficit position improved markedly to 2.5 per cent of gross domestic product GDP in 2007-2008. The increases in subsidies relating to oil, food and fertilisers, which are not accounted for in the budget, however, understated the deficit by 1 per cent of GDP, the report added.

Meanwhile, a five-year run of emerging market sovereign upgrades exceeding downgrades may be nearing an end, Standard 038; Poor8217;s said. Although upgrades still outnumber downgrades and emerging market governments with positive outlooks are more than those with negative outlooks, macroeconomic data are mixed and many particular credit stories are nuanced.

8220;We forecast that for 27 of the 42 sovereigns, growth will slow from 2007 to 2009,8221; said Standard 038; Poor8217;s credit analyst John B Chambers, chairman of the Sovereign Ratings Committee. 8220;The general government balances of 21 will deteriorate between 2007 and 2009. On the other hand, fiscal and external debt dynamics for most emerging market sovereigns will not worsen, according to our near-term forecasts.8221;

8220;Since we published our first semi-annual emerging market report card in September 2006, we8217;ve cautioned that global conditions may become less benign, putting emerging market policymakers to the test,8221; Chambers added.