Although S.&P. did not downgrade India’s debt rating on Wednesday, the revision in the outlook — from stable to negative — signaled that there was now at least a one-in-three chance of a downgrade sometime in the next 24 months, S.&P. said.
The agency rates India’s debt at BBB–. As this is the lowest investment-grade rating, a downgrade would carry heavy significance for investors that are already intensely nervous about the debt woes of Europe and the lethargic performance of the U.S. economy.
“We expect India’s real G.D.P. per capita growth will likely remain moderately strong at 5.3 per cent in the current fiscal year ending March 31, 2013, compared with about 6 per cent on average over the prior five years, but down from 8 percent in the middle of the last decade,” said Takahira Ogawa, a credit analyst at the agency.
A downgrade is probable if the country’s economic growth prospects dim, or fiscal reforms slow, Mr. Ogawa said.
On the other hand, he added, ratings could stabilize again if the government implements initiatives to reduce deficits and to improve its investment climate.
Young, populous and increasingly affluent, India has enjoyed many years of rapid growth, and is widely seen as one of the most important emerging economies in the world. But that momentum has slowed recently amid sluggish capital investment, fiscal indiscipline, poor infrastructure, and the gloomy global financial environment. Unlike most of the rest of emerging Asia, the country also has sizeable fiscal and current account deficits.
“High fiscal deficits and a heavy debt burden remain the most significant constraints on the sovereign ratings on India,” Standard & Poor’s said Wednesday, adding that it expected India to make only “modest progress in fiscal and public sector reforms,” given “the current political gridlock.”