In blow for India, S&P affirms negative rating outlook

By Suvashree Dey Choudhury and Shamik Paul

MUMBAI (Reuters) - Standard & Poor's reiterated its negative outlook on India's credit rating, which is one notch above "junk", warning of the need to follow through on reforms and dealing a blow to a government that had recently pitched for an upgrade.

The rating agency said the main drag on India's rating is a high fiscal deficit and heavy government borrowing, although it also said India's position had improved over the past year.

S&P's statement came as Finance Minister P. Chidambaram was in Paris to sell investors on India, part of a road show series that in recent months has taken him to New York, Singapore, Tokyo, London, Hong Kong, Frankfurt, Ottawa, and Toronto.

"We have indicated compared to one year ago, there (is) some easing of the pressure towards the downgrade of the rating," S&P credit analyst Takahira Ogawa said on a conference call on Friday.

"But nonetheless there is still more than one-third of chance for downgrade unless we see significant improvement of the factors that we mentioned," he said.

India's benchmark 10-year yield rose 4 basis points to 7.41 percent from levels before S&P issued a statement affirming the BBB- rating and negative outlook. The yield closed at 7.39 percent on Thursday.

Since taking office in July, Chidambaram has pushed a series of reforms aimed at shoring up government finances and reviving investor confidence in an economy that grew at just 5 percent in the fiscal year that ended in March, its worst in a decade.

However, the most recent parliamentary session ended early amid heated political acrimony over recent corruption scandals, stranding several pieces of legislation including a land reform bill.

"I would like to see more concrete steps, particularly on getting India's growth potential back - if not growth at least the potential - which is really getting hampered by the status quo in a lot of these reforms which ought to have come on board," said Shubhada Rao, chief economist at Yes Bank.

Chidambaram has said he will stick to a budgeted fiscal deficit target of 4.8 percent of gross domestic product in the fiscal year ending March 2014 after being able to trim the deficit to around 5 percent in the previous fiscal year.

"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.

S&P and its rival Fitch had cut their outlook on India to negative last year, warning the country of a possible rating downgrade to "junk" on worsening public finances, a slowing economy and persistent political gridlock in New Delhi.

In an April 25 meeting with S&P, Indian officials argued the outlook should be changed, and the country deserved an upgrade for actions taken by Prime Minister Manmohan Singh's government to put finances in order and bolster investor confidence.

(Additional reporting by Swati Bhat and Neha Dasgupta; Writing by Tony Munroe; Editing by Robert Birsel)