S&P upgrades India’s forex rating

The revised ratings were attributed to the strengthening of India’s liquidity position despite increase in oil prices last year. The total external debt is likely to decline to around 150 per cent of exports this year on account of growing export earning along with inflow of higher non-debt foreign capital, it said.

“The S&P move will certainly boost the image of the country. It will lead to better valuation of the country as a whole. One can expect higher inflow of foreign exchange on the basis of the new rating,” said the CEO of an automobile firm. The recently accelerated pace of reforms, liberalised rules for foreign and private investment in the insurance sector and steps to remove legal and regulatory barriers to greater investment in infrastructure should boost India’s prospects in the long term, S&P said.

India’s ratings were constrained by its high fiscal debt burden and high interest costs. Other constraints include consumption of nearly 40 per cent of the annual flow of domestic savings in India by the unreformed public sector.

However, Standard & Poor’s ratings on local currency continues to remain stable. The ratings reflects the lack of progress in raising fiscal revenue, resulting in large deficits at all levels of government. The growing local currency debt continues to be vulnerable to India’s credit ratings, though external debt has declined to below 20 per cent of the central government’s total debt.

India’s external resiliency, as shown by the strengthening of its liquidity position despite a near doubling of oil prices last year, is likely to improve in the coming years. Growing export earnings, especially from services, should be complemented with higher non-debt foreign capital inflows. As a result, total external debt is likely to decline to around 150 per cent of exports this year compared to over 180 per cent in 1996, and to fall further in coming year.

The upcoming removal of quantitative restrictions on imports, and likely continued strong growth in software and related exports, should further reduce India’s external debt and debt service burden. The enterprise, liberalised rules for foreign and private investment in insurance sector and ongoing steps to remove legal and regulatory barriers to greater investment in infrastructure sectors should boost the country’s long-term growth prospect.

The reforms should continue to improve the efficiency of the economy, enlarging the role of the private sector, the Standard & Poor release said. With the combined central and state governments deficits hovering at around 9 per cent of GDP this year, an upgrade in ratings will depend upon a reduction in India’s large fiscal deficits. In contrast to other areas, economic reforms have failed to correct the structural flaws in the country’s public finances. A credible and sustained strategy to achieve a fiscal primary surplus (deficit minus interest payments) would strengthen prospects for a ratings upgrade,if said.