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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.

Also read:How sovereign ratings are decided

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 per cent from levels before S&P issued a statement affirming the BBB- rating and negative outlook. The yield closed at 7.39 per cent on Thursday.

Since taking office in July, Mr. 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 per cent 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 per cent of gross domestic product in the fiscal year ending March 2014 after being able to trim the deficit to around 5 per cent 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.

Copyright: Thomson Reuters 2013

Story first published on: May 17, 2013 17:32 (IST)

Tags: S&P on India, Standard & Poor's, India downgrade

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