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Singapore, May 1: Standard&Poor's Rating Services affirmed its 'BBB-' long-term and 'A-3' short-term sovereign credit ratings on India. The outlook on the long-term rating remains stable, and reflects the country's strong economic prospects, external balance sheet, and its deep capital market, which supports a weak, but improving, fiscal position.

India's economic prospects remain strong, underpinned by the dynamic service sector, gradual deregulation of the industrial sector, continued trade liberalisation, and modest improvements in infrastructure, said Standard&Poor's.

Economic growth is also benefiting from higher consumption and private investment demand, due to a growing middle class and favorable demographics. ''Commitment to fiscal consolidation across all levels of government looks to be entrenched, aided by both strong revenue collection and expenditure controls,'' said Standard&Poor's credit analyst Takahira Ogawa.

The combined central and state government deficit is estimated at 5.5 per cent of GDP in fiscal year 2007 (India's fiscal year is April 1-March 31), down from 6.4 per cent in fiscal 2006.

Improvements have been led by a marked improvement at the state government level as they implement and adhere to fiscal responsibility laws (currently enacted by 26 out of 29 state governments as of end-2007).

''However, these improvements are overstated somewhat, given that the increases in subsidies for oil, food, and fertilizers-- estimated to be about one per cent of GDP--are not accounted for in the central government deficit,'' Mr Ogawa said.

''The ratings on India remain constrained by a weak fiscal profile, especially its high government debt burden and deficit, which are still among the largest for rated sovereigns,''he added.

The consolidated debt of India's central and state (general) governments is projected at 78 per cent of 2008 GDP, while interest payments are likely to consume about 30 per cent of general government revenue.

India's contingent liabilities are also high. General government-guaranteed debt is expected to amount to almost seven per cent of 2008 GDP.

The stable outlook balances India's strong external liquidity and growth prospects with its weak fiscal flexibility, it said.

Further, rating improvements will depend on sustained prudent fiscal policy that leads to further declines in the government debt and interest burdens, and additional reforms that lift the country's growth prospects and income levels.

By contrast, policies that reverse fiscal consolidation, weaken economic growth prospects, and erode the government's strong external liquidity position could lead to downward pressures on the rating, the agency pointed out.


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