India's fiscal improvements vulnerable to shocks: S&P

MUMBAI (Reuters) - India's hard-won fiscal improvements could fail to withstand an external shock, rating agency Standard and Poor's warned on Monday, given "less than rock solid" public finances that remain a concern for its sovereign rating profile.

"While the country's budgetary performances have strengthened in recent years, its hard-won fiscal improvements could yet unwind because of a financial or commodity shock," the rating agency said in a report, citing the need to pay out costly subsidies and interest on government debt.

The rating agency lauded India's efforts to increase capital expenditure by more than 25 percent in 2015/16, versus an average rise of 5.4 percent since 2011/12.

But it expressed concern that the spending plan could also be hit if India failed to raise the amount targeted from the sale of stakes in state-run firms.

"Particularly if divestment targets are also not met, the government could find it necessary to cut capital spending again to meet its deficit target," S&P said.

The government has a fiscal deficit target of 3.9 percent of gross domestic product for the current fiscal year, and has projected divestment of 695 billion rupees ($11.1 billion) to help reach it, but many analysts see this income level as ambitious.

India, constrained by a modest average income level and the government's weak fiscal position, has a BBB- rating from S&P, with a "stable" outlook.

Last week, Moody's raised India's outlook to "positive", bringing the country a step closer to a rating upgrade. Fitch reaffirmed its BBB-, "stable" outlook.

Major rating agencies give India the lowest investment grade rating. [ID:nL4N0X61EL]

The Narendra Modi government, which took power last May promising faster growth and more jobs, has been moving to fast-track infrastructure projects and remove policy uncertainty, as well as cut fuel subsidies. [ID:nNFR4gMn2H]

"Together with the resulting better growth prospects, these potential developments could also bring about stronger credit support for the government," S&P said.

($1=62.4700 Indian rupees)

(Reporting by Suvashree Dey Choudhury and Neha Dasgupta; Editing by Clara Ferreira Marques and Clarence Fernandez)