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Coalition politics to play spoil sport in ratings game - Views on News from Equitymaster
 
 
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  • Mar 22, 2000

    Coalition politics to play spoil sport in ratings game

    Standard & Poor’s (S&P) has revised the outlook of India's sovereign rating from stable to positive. The long term and short-term foreign currency ratings have been reaffirmed at BB and B respectively.

    Although the upgrade in outlook need not necessarily imply an upgrade in rating, it nonetheless highlights the improvement in the economic situation of a country. Infact, the S&P has stated that the key reason for the upgrade in outlook has been India's resilience and better prospects of economic reforms. S&P’s remark on resilience was in reference to the rise in the foreign currency liquidity position (software exports, FII and FDI inflows) positions despite the surge in oil prices.

    India's fiscal position however continues to remain an area of concern. The government has persistently overshot the fiscal deficit target, and infact in FY00, the fiscal deficit of 5.6% of GDP (new series) is one of the highest recorded in the 1990s. This has contributed to the large debt, and consequently, interest burden (which has also contributed to the high interest rates in the country).

    Then there is the issue of subsidies that have contributed to the significant deterioration in the national accounts. Although a 10% cut in the subsidy bill has been proposed for FY01, it seems unlikely that the government will limit its spending to targeted levels (already talks of a roll back of the cuts is gaining momentum). Estimates out the total subsidy bill at over 10% of GDP (including hidden subsidies).

    The fact that India’s external accounts have withstood the sharp jump in oil prices is a key factor highlighting the resilience of the economy. This has been largely made possible by the jump in receipts from software exports. However, on this front too, India is sitting on a time bomb – the Oil Pool Account, which is likely to run into a deficit of over Rs 300 bn if measures to correct the anomaly in prices are not taken soon.

    India's economic health is obviously not rosy as the ratings outlook upgrade makes it sound. For an actual ratings upgrade to materialise India needs to take stiff measures to curtail the deficits – by raising revenue, cutting subsidies and reducing the size of the government. Coalition politics will ensure that the government go slow on all these fronts.

     

     

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