India growth story intact, deficit a concern: S&P

India growth story intact, deficit a concern: S&P

Mumbai: Foreign fund flows into India are unlikely to reverse soon and jitters about Dubai’s debt problems may not last long, an official at rating agency Standard & Poor’s (S&P) told Reuters on Friday.

“I think the Indian economy has shown that it is pretty resilient and there aren’t many growth stories in the world right now, so I think the money isn’t going to disappear... but of course risks remain," Suzanne Smith, S&P’s managing director of ratings, south and southeast Asia, said. Foreigners had bought a record $17.4 billion worth of domestic shares in 2007 and they have so far bought about $15.3 billion in 2009.

“Among the companies we have credit ratings on ...I am not aware of any major exposure they have to Dubai," Smith added.

Dubai said on Wednesday it wanted creditors of state-owned Dubai World and its property subsidiary Nakheel, to agree to a debt standstill in a first step towards restructuring.

Dubai World, the conglomerate that spearheaded the emirate’s breakneck growth, had some $59 billion in liabilities as of August. The news sent shockwaves globally, rekindling worries about the strength of global economic recovery.

“An event like this can have an effect on the market as a whole, but I don’t really see that as long lived," Smith said.

S&P said its outlook for the Indian economy is positive although the poor monsoon season pulled growth numbers down a bit. It expects India to grow at 5.8 percent in calendar 2009 and at 7% next year.

Fiscal Consolidation

In February, though S&P retained India’s BBB- long-term sovereign credit rating, the lowest rung of investment grade, it cut sovereign’s outlook to negative, citing worsening government finances.

“We are still looking at what fiscal consolidation will occur in the medium-term and we are waiting to determine if that would be adequate," Smith said.

India’s budget deficit is projected to hit a 16-year high of 6.8% of gross domestic product in fiscal 2009-10.

“There is a good potential for the divesture programme to help ease the deficit," she said, adding, it hinges on the government’s willingness “to take probably very difficult steps".

Central bank data showed bank loans grew an annual 9.8% as at 6 November, much lower than the more than 20% earlier in the year. But the bank expects loans to grow at 18% by the fiscal year end in March 2010.

Smith said she does not expect an immediate rise in corporate funding costs if the central bank withdraws its accommodative policy stance, as current demand for credit was “not terribly high".

“Achieving the 18% credit growth projection would be very challenging," Smith said.