Mumbai, Oct 10: There is a “one in three” chance of a downgrade of India's sovereign rating to junk status in the next two years, global credit ratings agency Standard & Poor's said today.
“The negative outlook signals at least a one-in-three likelihood of a downgrade of the sovereign rating on India within the next 24 months,” S&P analysts Takahira Ogawa and Elena Okorochenko said in a note issued today.
On the upside, especially given the slew of reform measures carried out by the government in the past three weeks, the outlook can be revised upwards to stable if the government succeeds in reducing fiscal deficit, improve the investment climate and revives growth, S&P said.
Factors forcing a downgrade would be a drop in growth prospects, deterioration on the external front, worsening of the political climate and slow movement on fiscal reforms.
In June, the agency revised its outlook on the present BBB- rating to negative, which is one notch above junk grade and the lowest investment rating in among the BRIC economies.
It estimates the fiscal deficit to shoot up to 6 per cent from the targeted 5.1 percent this fiscal, and growth to fall to 5.5 per cent compared to the government's revised projection of 6.5 per cent.
“Fiscal measures to lower deficits could include a more efficient use of fuel, fertiliser, and agricultural subsidies, or the implementation of a goods and service tax,” it suggested.
S&P has drawn attention to the risks on the political front like Mamata Banerjee-led Tranamool Congress quitting the ruling alliance, impending state elections and the general elections in 2014.
Considering that the government is in a minority, passage of amendments to allow additional foreign ownership in insurance and pension will be “more challenging”, S&P said.
S&P had come out with a note asking for action from the political establishment and Prime Minister Manmohan Singh in June, when “policy paralysis” was a buzzword, to avoid being junked.
Last month, it welcomed the slew of reforms like allowing foreign holdings in multi-brand retail, aviation and media, but kept the outlook unchanged.
S&P's rivals Moody's and Fitch had also revised their respective outlooks on the sovereign rating to negative following the gloom on the economic front caused by factors both external and domestic.
The Finance Ministry had earlier said it would present the country's strengths to the rating agencies to avoid a downgrade.
