Credit rating agency Standard and Poor's (S&P) reiterated its negative outlook on India's BBB- sovereign rating on Friday while warning that there is at least a one-in-three likelihood of a downgrade within the next 12 months, Reuters reported.
"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," S&P said in a statement issued on Friday.
BBB- is the lowest investment grade and a downgrade will take India’s sovereign rating to speculative or junk status.
The ratings agency said the government’s modest efforts to check heavy debt burden has not yielded desired results and its success in raising investment growth remains uncertain. However, it said India’s position had improved over the past year.
"High fiscal deficits and a heavy government debt burden remain the most significant constraints on our sovereign ratings on India. Nevertheless, the government has regained control of public finances and embarked on fresh structural reforms since September 2012," S&P credit analyst Takahira Ogawa said.
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"However, India's current account deficit widened significantly to 4.2 per cent of GDP in fiscal year ended March 2012 and our estimate of 4.5 percent in the fiscal year ended March 2013, the highest level in more than a decade, from 1-2 per cent before that," he added.
S&P said although part of this slower growth in India is cyclical, rigidities in the labor and product markets and inadequate infrastructure constrained the country's medium-term growth prospects.
Reacting to the ratings outlook, India's Economic Affairs Secretary Arvind Mayaram said the there is nothing to worry as the economy is on the right track.
"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", he said, the Press Trust of India (PTI) news agency reported.
India's Finance Minister P. Chidambaram, since taking office in July last year had initiated a series of measures - including injecting foreign direct investment in retail and aviation sectors - to boost investments and economic growth. However, the second round of economic reforms has been delayed as the recent parliament session ended early, due to a deadlock over corruption scandals.
However, the ratings agency said it will revise the ratings to stable if government goes ahead with the planned reforms and boosts investments, while cutting down subsidies.
"We may revise the outlook to stable if the government carries through with its plans to unleash public and private investments (for example, by enacting the land acquisition bill), to implement a nationwide government sales tax, or to further trim fuel and fertilizer subsidies," S&P said.
The agency expects India's real GDP per capita growth will likely rebound to 4.6 percent in the current fiscal year from 3.6 percent, a year ago.
Standard & Poor's revised India's ratings outlook to negative from stable in April 2012, citing the country's lower GDP growth prospects and risks involved in its external liquidity and fiscal flexibility.
Last month, during a meeting with S&P representatives, Indian Finance Ministry officials had argued for a ratings upgrade stating that the government has been initiating steps to contain fiscal deficit and promote investments and economic growth.
Moody’s and Fitch had also kept India’s sovereign ratings a notch above the junk status. In the first week of May, Moody’s while expressing concerns over the high consumer inflation and current account deficit had hinted about a possible ratings downgrade.