Mumbai: Not impressed by a series of economic reforms, global agency Standard & Poor's on Wednesday threatened to downgrade India's sovereign credit rating to junk grade within 24 months in absence of steps to check fiscal deficit and improve investment climate.
"A downgrade is likely if the country's economic growth prospects dim, its external position deteriorates, its political climate worsens, or fiscal reforms slow," the agency said in a report.
S&P, however, said that it could improve rating outlook from negative to positive if "the government implements initiatives to reduce fiscal deficit, improves its investment climate, and increases growth prospects".
The rating agency in April had changed the rating outlook of India from stable to negative, reflecting the possibility of a downgrade.
The country's present rating is BBB-(Negative), the lowest investment grade rating, and a downgrade would result in India's rating slipping to junk status, raising the cost of overseas borrowings by domestic corporates.
"The weaker global economic outlook and domestic policy instability contributed to deteriorating growth prospects and investor confidence in the country. In our view, there is a significant chance that this trend could eventually affect political, economic, fiscal or external factors to lower the credit rating on India", S&P report said.
Meanwhile, the agency lowered ratings of two state-owned banks State Bank of India and Union Bank of India (UBI) by a notch.
"We revised the stand-alone credit profile (SACP) of SBI to 'bbb-' from 'bbb' and that of UBI to 'bb+' from 'bbb-' based on our anticipation of the banks' weak asset quality performance," it said.
Although S&P took note of the efforts taken by the government to push long-pending reforms like hiking diesel prices and raising FDI cap in insurance from 26 percent to 49 percent, it said, "with two state elections, including Gujarat, which will be held in December 2012, the government has only a small window to implement reforms".
In order to prevent the downgrade, the rating agency said that government's initiatives to reduce fiscal deficit should include a more efficient use of fuel, fertiliser, and agricultural subsidies, or the implementation of a goods and service tax.
The fiscal deficit, according to the rating agency, was expected to rise to 6 percent of the Gross Domestic Product (GDP) during 2012-13 as against the government's estimate of 5.1 percent.
The rating agency had already lowered India's growth projection for the current fiscal to 5.5 percent, as against the earlier forecast of 7 percent, due to weak domestic and external demand.
"Although there is still downside risk because of the uncertain external demand, the negative impact of the monsoon, and political paralysis, the declining growth may soon bottom out", it added.
Referring to recent series of economic reforms, the rating agency said, "After a long wait, the government seems to have re-ignited reform efforts, and that bodes well for the future development of the country."
These reforms, it added, has come with a political cost with the Trinamool Congress quitting the coalition. "As a result, the coalition has become the minority in both the upper and lower houses of Parliament", it said.
In knee-jerk reaction to S&P's rating downgrade threat, the Sensex Wednesday nosedived by 162 points to close at 18,631.10 points.