New Delhi, May 17: Global agency Standard & Poor's on Friday 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.
India's long-term growth prospects and its high foreign exchange reserves support the rating, while its large fiscal deficits and a heavy government debt burden constrain it.
"We expect the GDP growth rate of 6 per cent in the current fiscal. Headline and core inflation has come down in recent months," Ogawa said in a conference call.
Asked what could reverse the negative outlook, he said: "If the government carried forward current reform agenda, push some more reforms like land bill, GST as well as narrow down fiscal deficit and CAD and trim subsidies. This could significantly change the outlook".
He, however, said compared to an year ago, there is an easing of pressure on ratings downgrade.
S&P said there could be a rating downgrade in case of anaemic investment growth, reversals on diesel or other subsidy measures, or inability to increase electricity supply to meet increasing demand.
"We believe these measures could restore India's robust growth, and thereby ameliorate its public debt trajectory," S&P said.
It further said it expects the current account deficit (CAD) to improve slightly -- mainly because of lower prices of oil and gold -- but remain high at about 4 per cent in the current fiscal year it said.
The CAD, which is the difference between the outflow and inflow of foreign currency, touched a historic high of 6.7 per cent in October-December quarter.
"India's external position remains resilient despite a deterioration in the past two years," Ogawa said.
In the current fiscal, the economy is projected to grow at 6.1-6.7 per cent, up from the decade's low level of 5 per cent growth clocked in 2012-13 fiscal.
