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Standard & Poor’s Ratings Services has raised its long-term foreign currency rating on India by one notch to ‘BB+’, and affirmed its ‘BB+’ long-term local currency, and short-term ratings. The outlook is stable. The upgrade on the foreign currency reflects India’s improved external position and growth prospects.

Standard & Poor’s also raised its long-term foreign currency rating on the Export-Import Bank of India by one notch to ‘BB+’ in line with the upgrade on the sovereign credit rating.

“India’s external balance sheet has strengthened markedly, due to reserves accumulation and prudent debt management, which should lower the external liquidity risk from its fiscal vulnerability,” says Standard & Poor’s credit analyst Ping Chew, director, sovereign and international public finance group.

India’s external position – stronger than all other sovereigns in ‘BB’ rating category – is resilient and likely to be maintained in the coming years. Its foreign exchange reserves, now more than 20x short-term debt and 6x gross financing requirements, mitigate the risk of volatility in external and domestic confidence. The strong growth in export earnings, particularly from the service and manufacturing sectors, as well as non-debt foreign capital inflows should alleviate the impact of rising imports. India’s external debt and debt service burden is expected to fall in the years ahead.

India’s economic prospects are stable and good, with GDP growth likely to hover at 6.5-7% in the medium term. The service sector is dynamic, while the industrial sector is benefiting from gradual deregulation, trade liberalisation, and modest improvements in infrastructure. The business environment is likely to improve in the coming years, sustaining private investment and economic growth. The banking system has also improved with reforms; it can now support a higher economic growth, while reducing the contingent risk on the government.

The stable outlook on the ratings reflects the expectation that the pace of the following will be gradual: fiscal correction, further improvements in the external sector, and lifting India’s potential growth rate substantially.
The principal risks to India are generated by a weak fiscal profile, especially its high deficit and debt, and serious fiscal inflexibility, which is one of the worst among rated sovereigns. Although the central government has stepped up efforts to rein in the deficit, the consolidated central and state government deficits will amount to 10% of GDP in the near term, which will push the ratio of general government debt to GDP higher, from more than 80% currently. The public sector, especially the electricity sector, is also inefficient.