India's improved political setting offers a conducive environment for reforms, which could boost growth prospects and improve fiscal management, the ratings agency while revising upwards the country's outlook

Ratings agency Standard & Poor's (S&P) on Friday raised its outlook on India to 'stable' from 'negative' with 'BBB-minus' rating reflecting its views that the country's improved political setting offers a conducive environment for reforms, which could boost growth prospects and improve fiscal management.

"The stable outlook for the next 24 months reflects our view that the new government has both the willingness and capacity to implement reforms necessary to restore some of India's lost growth potential, consolidate its fiscal accounts, and permit the Reserve Bank of India (RBI) to carry out effective monetary policy," S&P said in a release.

The ratings agency had cut India's rating to "negative" in April 2012, and that came to symbolise the plummeting investor confidence in India because of corruption cases and the lack of action by the then Congress-led government.

Talking about its ratings on India, S&P said, it reflects the country's strong external profile, combined with its democratic institutions and free press, both of which underpin policy stability and predictability. These strengths are balanced against the vulnerabilities stemming from the country's low per capita income and weak public finances.

India's external position is a key credit strength. The country has relatively little external debt and a much improved external liquidity position. S&P said, "We project that, at the fiscal year end of March 31, 2015, external debt net of external assets will be 6% of current account receipts (CARs). Central bank reserves well exceed public sector external debt, reflecting the public sector's ability to finance practically all of its borrowing requirement domestically. On a broader definition, India's net external liabilities are a low 49% of CARs based on our projections at the end of the current fiscal year in March 2015, and nearly half of gross external liabilities consist of inbound foreign direct investments."

According to the ratings agency, India's current account has improved in recent years after restrictions on gold imports and slower domestic investment demand. At the same time, the central bank rebuilt its foreign currency reserves to cover about 5.5 months of current account payments. Although we expect the current account deficit to widen from its current low of 1.8% of GDP (as of March 2014) as investment picks up, gross external financing needs are likely to remain at or below the sum of CARs plus usable reserves in the next two to three years, it added.

"India's well-entrenched democratic political system is another credit support," S&P said, adding, "that, along with the country's mature and stable institutions (including free press) and system of checks and balances, has afforded India a long period of stability. Although the paralysing effect of legislative gridlock can blunt government effectiveness, our outlook revision indicates that we believe the current government's strong mandate will enable it to implement many of its administrative, fiscal, and economic reforms."

"We expect the new administration to adhere to its stated fiscal consolidation program, even though we acknowledge that planned revenues may not fully materialize and subsidy cuts may be delayed. We expect improved fiscal performance in the medium term primarily from revenue-side improvements brought about by the planned introduction of a national goods and services tax (GST) and administrative efforts to expand the tax base. We project net general government debt to decline to below 60% of GDP by the year ending March 2018, and with it, general government interest rate expense to just under 20% of revenues. A faster pace of deficit and debt reduction is unlikely in our view. Hence, we believe fiscal and debt metrics are set to remain key rating constraints for some time," S&P added.