It included among those risks measures to enhance the effectiveness of the government and create a more positive operational environment for business and private investments.
The negative outlook also reflects India's limited progress on fiscal consolidation, particularly on reducing the central government deficit despite improvement in the financial health of state governments, Fitch said in a statement.
"Against the backdrop of persistent inflation pressures and weak public finances, there is an even greater onus on effective government policies and reforms that would ensure India can navigate the turbulent global economic and financial environment and underpin confidence in the long-run growth potential of the Indian economy," said Art Woo, director in Fitch's Asia-Pacific Sovereign Ratings group, in a statement.
Fitch affirmed India's long-term foreign- and local currency Issuer Default Ratings (IDRs) at 'BBB-' and short-term foreign currency at 'F3'. India's country ceiling is also affirmed at 'BBB-'
The agency also cautioned that a significant loosening of fiscal policy - that would increase the debt-GDP ratio - would result in a downgrade of India's sovereign ratings.
"...a material downward revision of Fitch's assessment of the India's medium-term growth potential along with persistent high inflationary pressure would hurt India's sovereign creditworthiness," Fitch said in a statement.
A STRING OF WARNINGS
The downgrade is the latest among the manY warning flags that analysts, experts and top brokerages have raised about the economy in the recent past.
Last week, ratings agency Standard and Poor’s had warned that India will be the first “fallen angel” among the BRIC economies, saying the country could lose its investment grade rating, citing slow GDP growth and roadblocks to economic policymaking.
In May, banking giant HSBC had described the Indian economy as a “gasping elephant”, saying the slowdown in economic growth was "deepening" and the downside risks to the outlook have increased.
India's economic growth rate slowed to a nine-year low in the March quarter at 5.3 per cent and 6.5 per cent for 2011-12.
S&P had said that India stood to lose its investment grade rating and could become the first 'fallen angel' among the four BRIC countries, comprising Brazil, Russia, India and China.
S&P had cited slowing GDP growth and political roadblocks to economic policymaking as some of the factors that could lead to such an action. It also said internal differences in the Congress Party was partly responsible for the stalling of reforms.
"The crux of the current political problem for economic liberalization is, in our view, the nature of leadership within the central government, not obstreperous allies or an unhelpful opposition. The Congress party is divided on economic policies," S&P credit analyst Joydeep Mukherjee wrote. "There is substantial opposition within the party to any serious liberalisation of the economy."
The report also pointed to the sructure of the Congress, pointing out that "... paramount political power rests with the leader of the Congress party, Sonia Gandhi, who holds no Cabinet position, while the government is led by an unelected prime minister, Manmohan Singh, who lacks a political base of his own".