S&P Terms India Budget Relatively Prudent

 WSJ :KHUSHITA VASANT:February 28, 2013, 8:44 a.m. ET

Standard & Poor's, which has been warning India of a possible credit downgrade, Thursday termed the country's federal budget for the next fiscal year as "relatively prudent," but said there is potential for the government to exceed its expenditure target.

Finance minister Palaniappan Chidambaram tried to balance political compulsions with promises of financial discipline in his budget, saying he will raise spending but will stick to a fiscal road map.

India's 16.6 trillion rupee ($307 billion) budget for the fiscal year starting April 1 aims to increase spending by 16%. This underscores the pressure on New Delhi to continue to spend on development plans in the education, health and other social sectors, with an eye on improving its prospects at state elections this year and federal polls in 2014.

The budget, S&P said, was prudent despite the weak economic environment and the political temptation to increase fiscal expenditures ahead of a general election.

The budget has no impact on the agency's sovereign credit rating on India, S&P said in a press release.

India's ratings continue to reflect the country's favorable long-term growth prospects, moderately deep capital markets, and high foreign-exchange reserves, it said. However, "large fiscal deficits and debt, and its lower middle-income economy constrain the ratings."

In April last year, S&P maintained India's credit rating at triple-B-minus, the lowest investment-grade rating, and said there was a one-in-three chance that it could be downgraded to the "junk" status "if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow in a weakened political setting."

It reiterated the warnings in October.

Mr. Chidambaram, while presenting the budget in parliament, projected that the country's fiscal deficit will be 4.8% of gross domestic product next fiscal year, narrower than this year's 5.2% gap, which betters its own previous projection of 5.3%.

S&P noted that the improvement in the current fiscal year's deficit was achieved by cutting spending. At the same time, there is little progress in structural reforms to reduce the vulnerability of the government's fiscal position, it added.

For instance, India is still vulnerable to volatility in the prices of oil and other commodities, it added.

S&P said the government is looking to achieve fiscal consolidation next year mainly through steps to boost revenue. Some of these steps are temporary, it said.

Developments on India's growth, its external position, fiscal reforms and political climate are the factors which will influence the country's sovereign ratings in the medium term, the ratings firm said.