Credit rating agency Standard & Poor's Wednesday cut India's outlook on the long-term rating to negative from stable, saying that the country's economy is facing high fiscal deficits and a heavy debt burden.
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, S&P's credit analyst Takahira Ogawa said.
S&P is expecting only modest progress in fiscal and public sector reforms, given the current political gridlock and the fact that the next elections will be held only by May 2014. On a positive note, S&P points out that India's external position remains resilient despite the deterioration in the past two years.
India's fiscal deficit is 5.9 percent of the gross domestic product (GDP) and the current account deficit is 3.6 percent, figures that don't augur well for the country's economic growth. The current account deficit was high because of high oil prices and gold imports. The government has proposed to bring down the fiscal deficit to 5.1 percent of the GDP in the current fiscal.
According to the Reserve Bank of India, the country's growth story remains intact in spite of the twin deficits. Earlier this month, the central bank stressed that there was no likelihood of a repeat the situation in 1991 when India faced a balance of payments problem as a result of large fiscal spending in the previous years.
The economy grew 6.1 percent in the quarter ended December 31. This was the slowest growth in nearly three years and was a major slowdown from the July-September quarter when GDP growth was 6.9 percent. In the April-June quarter, growth was 7.7 percent. The country saw annual growth of 8.4 percent in the last two fiscal years.
We expect India's real GDP per capita growth will likely remain moderately strong at 5.3 percent in the current fiscal year ending March 31, 2013, compared with about 6 percent on average over the prior five years, but down from 8% in the middle of the last decade, Ogawa said.
At the same time, S&P reported that Indian government's ability to implement policies had weakened due to the slow and complex decision-making process and the extent to which the UPA government could implement measures to improve economic growth and fiscal prudence would be vital to boosting confidence in India.