DBRS ups India’s credit rating from -ive

DBRS has assigned a ‘BBB(low)’ on India’s long-term foreign currency and local currency debts. A ‘BBB’ signifies medium risk.

“Estimates indicate that the general government deficit will decline from 8.3 per cent of GDP in 2010-11 (8.7 per cent of GDP excluding privatisation receipts) to 5.4 per cent of GDP in 2014-15,” DBRS said.

This effort,combined with reductions in subsides,changes in the tax code and privatisation of state assets,will reduce net general government debt estimated at about 75 per cent of GDP in 2010-11,it added.

“Overall,India has adopted a more responsible medium-term fiscal policy and commitment to debt reduction,and this bodes well for the ratings,” DBRS said.

The government,it added,”is addressing the country’s infrastructure deficit by spending USD 514 billion,or 9 per cent of GDP,on infrastructure between 2007-2012,and an additional USD 1 trillion from 2013-2017.”

The government plans to spend USD 1 trillion on infrastructure during the 12th Plan period,of which half is expected to come from the private sector.

Complimenting India for reform initiatives,the DBRS said the country has freed petrol prices and is in the process of revamping the direct tax laws.

“A new direct tax code which could improve tax efficiency may be enacted in April 2012. Once introduced,a national identification card may in the coming years increase labour market formality,raise tax compliance and streamline subsidies and social security expenditures,” it said.

DBRS further said the proposed Goods and Services Tax (GST),once implemented,would help in streamlining the indirect taxation regime in the country.

“India’s fiscal and monetary policy response to the global credit crisis helped restore the economy to a path of higher growth. The economy has weathered the global credit crisis relatively well,and a strong private sector-led recovery has returned India’s growth rates to pre-crisis levels,” it said.

The government expects the economy to grow by an average of 9 per cent,plus or minus 0.25 per cent,during the 12th Five Year period (2012-17).

DBRS,however,cautioned against the high debt ratio and the high inflationary pressure in the country.

“India’s debt ratios are among the highest among developing economies,” it said.

Though the net general government debt has come down to 66.5 per cent of GDP in 2010-11,as per DBRS’s definition which includes transfer and subsidies,from 81.9 per cent of GDP in 2005-06,this is still among the highest among low to middle income countries.

“Furthermore,the general government deficit was a relatively high 8.3 per cent of GDP in 2010-11,food and fertiliser price subsidies are costly,and an estimated 33.9 per cent of revenues went to paying interest on debt in 2011-12,” it said.

Regarding inflation,which is currently above 9 per cent,it said that the country “suffers from high inflation inertia and poorly anchored inflation expectations.”

Besides high international commodity prices,DBRS also blamed domestic pressures like high money supply growth and inefficiencies in agriculture as reasons for high inflation.

“Tighter fiscal and monetary policies and,over time,better infrastructure and structural reforms should help to anchor inflation expectations,” it said.

India’s sovereign debt is rated by six international sovereign credit rating agencies — Standard and Poor’s (S&P),Moody’s Investor Services,DBRS,Fitch Ratings,Japanese Credit Rating Agency (JCRA) and Rating and Investment Information (R&I).

Earlier this week,Fitch had also retained India’s sovereign rating at investment grade,stating it has “robust growth prospect” and solid external financial condition.

The agency affirmed long term ‘BBB-‘ rating for the country with stable outlook.