India faces one-in-three chance of rating downgrade, says S and P

India faces one-in-three chance of rating downgrade in the next two years, in case the government fails to push reforms in view of the political gridlock and ensuing general election in 2014, Standard & Poor’s said on Tuesday.

The problems being faced by the economy include soaring fiscal deficit and high inflation, S&P said while retaining India’s rating at ‘BBB-’, 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. High fiscal deficit and a heavy debt burden would remain the most significant rating constraints, it said. Things could improve with government initiatives to reduce deficit and improve investment climate. “With the next elections to be held by May 2014 — and the current 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.