New Delhi: Global agency Standard and Poor's (S&P) on Wednesday lowered India's rating outlook to negative and warned of a downgrade in two years if there is no improvement in the fiscal situation and the political climate continues to worsen.
The lowering of outlook from stable (BBB+) to negative (BBB-) is expected to make external commercial borrowings expensive for Indian Inc. It may also have implications for the capital market.
"The outlook revision reflects our view of at least a one-in-three likelihood of a downgrade if the external position continues to deteriorate, growth prospects diminish or progress on fiscal reforms remains slow in a weakened political setting" said S & P's credit analyst Takahira Ogawa in a statement.
BBB- is the lowest investment grade rating.
Commenting on the rating action, Jagannadham Thunuguntla, strategist and head of research at SMC Global Securities, said "Indian (new) sovereign rating is just one step away from junk bond status...Somehow I feel the dream of India growth story is coming to an end".
The negative outlook, the rating agency further said, signals likelihood of the downgrade of India's sovereign within the next 24 months. "A downgrade is likely if the country's economic growth prospects is dim, its external position deteriorates, its political climate worsens, or fiscal reforms slow", it said.
The lowering of rating outlook comes despite Finance Ministry pitching for an upgrade at the recent round of meetings between the officials and representatives of the S&P.
S&P said India's real GDP per capita growth will likely remain moderately strong at 5.3 percent in 2012-13, compared with about 6 percent on average over the prior five years.
"India's favourable demography and the increasing middle- class population will undergird its medium-term growth prospects, which in turn will support the sovereign ratings," Ogawa said.
India's favourable long-term growth prospects and high level of foreign exchange reserves support the ratings, the agency said. On the other hand, India's large fiscal deficits and debt, as well as its lower middle-income economy, constrain the ratings, it added.
"High fiscal deficits and a heavy debt burden remain the most significant constraints on the sovereign ratings on India. We expect only modest progress in fiscal and public sector reforms, given the political cycle--with the next elections to be held by May 2014--and the current political gridlock," S&P said.
Such reforms include reducing fuel and fertiliser subsidies, introducing goods and services tax (GST), and easing of restrictions on foreign ownership of various sectors such as banking, insurance, and retail sectors, it said.
On the other hand, S&P said the ratings "could stabilise again if the government implements initiatives to reduce structural fiscal deficits and to improve its investment climate".
Fiscal measures could include an increase in domestic prices and a more efficient use of fuel and fertiliser subsidies, or an early implementation of the GST.
Reacting to the rating action, a senior Finance Ministry official said India's growth rate is intact and robust and it is not going to have any major impact on the country.
"We are not overtly concerned about revision. Other nations make India look good," the official added.
First Published: Wednesday, April 25, 2012, 12:32