New Delhi: Global agency Standard & Poor's Friday threatened to downgrade India's rating to 'junk' status if it fails to pursue reforms, "disappointing" the government which retorted by saying the international investors hold a different view and there was nothing to be worried about.
While retaining India's sovereign rating at 'BBB-' with a negative outlook citing high fiscal and current account deficits, S&P said there is at least a one-in-three likelihood of a downgrade within the next 12 months.
"We may lower the rating if we conclude that slower government reforms than we currently expect would not lead economic growth to recover to levels experienced earlier this decade," the rating agency said in a statement.
While the Chief Economic Advisor to the Finance Ministry Raghuram Rajan described the rating action as "disappointing", Economic Affairs Secretary Arvind Mayaram said: "I think we are on right track and the reform process will continue and therefore I don't think there is anything to be worried about".
According to Rajan, "S&P has not seen it fit to improve its outlook for India, especially given that it acknowledges the important steps taken by the Indian Government in recent months.
"International institutional investors, who have invested over USD 17 billion into India so far this year, do seem to have a different view".
'BBB-' is the lowest investment grade and a downgrade would mean pushing the country's sovereign rating to junk status, making overseas borrowings by corporates costlier.
"We have indicated compared to one year ago, there (is) some easing of the pressure towards the downgrade of the rating," S&P credit analyst Takahira Ogawa said on a conference call.
Last month at a meeting with S&P, Finance Ministry had pitched for a rating upgrade arguing that the government has been taking steps to contain deficit and promote investments.
Terming high fiscal deficits and a heavy government debt burden as the most significant constraints on sovereign ratings, Ogawa said inadequate infrastructure constrain the country's medium-term growth prospects.
"Despite the initiatives from the cabinet committee on investments to cut red tape on infrastructure and power projects, that committee's success in raising investment growth remains uncertain," S&P said.
Asked what could reverse the negative outlook, Ogawa said: "If the government carried forward current reform agenda and pushed some more reforms like land bill, GST as well as narrow down fiscal deficit and current account deficit (CAD) and trim subsidies. This could change the outlook".
Referring to S&P's concerns on stalled reforms in Parliament, Mayaram said reforms are not done only in Parliament but at executive levels as well.
"(Another) issue they raised is stalled reforms in Parliament ... I think it is a very narrow way of looking at reforms ... There is always a executive space for reforms and government is moving," Mayaram said.
Ogawa said: "We expect the GDP growth rate of 6 percent in the current fiscal. Headline and core inflation has come down in recent months".
The government estimates the economy to grow at 6.1-6.7 percent, up from the decade's low level of 5 percent growth clocked in 2012-13 fiscal.
The rating agency said the proposed Food Security law would expand coverage of food subsidies to almost two-thirds of India's households, which could double the size of its food subsidy bill to about 1.6 percent of GDP.
However, the government needs to balance its finances in a manner that it should not bloat its expenditure, Ogawa said.