S&P warns India of rating downgrade; retains negative outlook

Retaining India's sovereign rating at 'BBB-' with a negative outlook, S&P said there is at least a one-in-three likelihood of a downgrade within the next 12 months

Global agency Standard & Poor's today warned that it may downgrade India's sovereign rating to junk grade if the government fails to pursue reforms and check deterioration in fiscal and current account deficits.

While retaining India's sovereign rating at 'BBB-' with a negative outlook, 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," S&P said in a statement.

'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.

"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.

S&P said although part of this slower growth in India is cyclical, rigidities in the labour and product markets and 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," it said.

Last month during a meeting with S&P representatives, Finance Ministry officials had pitched for a ratings upgrade arguing that the government has been taking steps to contain fiscal deficit and promote investments.