Mumbai, Dec. 11 (PTI): India faces one-in-three chance of a rating downgrade in the next two years if the government fails to push reforms in view of the political gridlock and an ensuing general election in 2014, Standard & Poor’s said today.
The problems being faced by the economy include a high fiscal deficit and high inflation, S&P said while retaining India’s rating at “BBB-”, the lowest in the investment grade.
Any further downgrade will push India’s rating to the junk status, making it difficult and costlier for Indian entities to borrow funds overseas.
“The negative outlook signals at least a one-in-three likelihood of a downgrade within the next 24 months. A downgrade is likely if India’s economic growth prospects dim, its external position deteriorates, its political climate worsens, or fiscal reforms slow,” S&P said.
High fiscal deficit and a heavy debt burden will remain the most significant rating constraints, it said, adding that things could improve with government initiatives to reduce the deficit and improve investment climate.
“Given the political cycle — with the next elections to be held by May 2014 — and the political gridlock, we expect only modest progress in fiscal and public sector reforms.
“Such reforms include reducing fuel and fertiliser subsidies, introducing a nationwide goods and services tax, and easing of restrictions on foreign ownership in various sectors such as banking, insurance, and retail,” S&P said.
Earlier this month, Fitch warned that it would cut India’s sovereign rating if the government eased up on its fiscal consolidation plans or was unable to reverse the slowdown in growth.