Global rating agency Standard & Poors has warned that a reversal of the fiscal consolidation process, especially with rising off-balance sheet subsidy costs, in tandem with a deterioration in the country’s balance of payments performance, could put pressure on India’s credit standing.

The recent rise in domestic prices has resulted in a sharp rise in subsidies handed out by the central government. “While India’s official central government fiscal deficit position markedly improved to 2.5 per cent of GDP in fiscal 2007-08, increased subsidies relating to oil, food, and fertilisers were not accounted for and are estimated to have understated the deficit by about 1.0 per cent of GDP,” S&P said in its Asia-Pacific Sovereign Report Card.

It said recent higher global oil prices are further pressuring the government's fiscal position in terms of supporting India’s oil-marketing public companies, leading the government to announce an increase in petroleum and diesel prices.

Although this will reduce the fiscal burden, the government has still had to issue Rs 94,600 crore (1.8 per cent of GDP) in oil bonds. “The fiscal deficit will likely face further pressures: rising commodity prices will likely lead to subsidy increases and the 6th Pay Commission has recommended salary increases for government employees,” S&P said.

According to S&P, with polls expected to take place within 12 months, the government is acutely aware that the failure to manage both rising domestic prices and an economic slowdown may bring retribution at the polls.

As for inflation, the benchmark wholesale price index (WPI) rose to 8.1 per cent in late May, the fastest pace since November 2004 and above the Reserve Bank of India’s (RBI’s) target of 5.0 per cent for fiscal 2007-08. The RBI increased the cash reserve ratio by 25 basis points to 8.25 per cent on April 29. With fuel-price hikes, the WPI exceeded 11 per cent in the near term. The authorities are also grappling with signs that the economy is slowing — the forecast is for 7.5 per cent growth in fiscal 2008-09, down from 8.7 per cent in 2007-08 and 9.6 per cent in 2007-06, S&P said.

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