Credit rating agency Standard & Poor has revised India’s outlook to negative. The agency has reaffirmed sovereign credit rating at investment grade but suggested that the probability of a downgrade is now higher than before.

The agency sees little progress on economic reforms and believes that the GDP growth could fall to 5.3 per cent in 2012-13. The Indian government expects GDP growth of over 7 per cent. "The outlook revision reflects our view of at least a one-in-three likelihood of a downgrade if the external position continues to deteriorate, growth prospects diminish, or progress on fiscal reforms remains slow in a weakened political setting," said Standard & Poor's credit analyst Takahira Ogawa.

India's favorable long-term growth prospects and high level of foreign exchange reserves support the ratings, but they are restrained by large fiscal deficits and debt, as well as its lower middle-income economy, the ratings agency said,

S&P is not confident about the government achieving control over fiscal deficit. The fiscal deficit – or the difference between the government receipts and spending – is expected to be 5.1 per cent of the gross domestic product or GDP for the year ended 2012-13. S&P does not think these targets could be achieved.

“High fiscal deficits and a heavy debt burden remain the most significant constraints on the sovereign ratings on India. We expect only modest progress in fiscal and public sector reforms, given the political cycle--with the next elections to be held by May 2014--and the current political gridlock,” Ogawa wrote.

“Such reforms include reducing fuel and fertilizer subsidies, introducing a nationwide goods and services tax, and easing of restrictions on foreign ownership of various sectors such as banking, insurance, and retail sectors.”

In February 2012, the agency warned that the balance of risk factors for the current sovereign credit rating on India may be shifting to negative.

The rating agency, which hit the headlines earlier this year for downgrading the Untied States’ credit rating for the first ever to below AAA, said India’s risk factors included high inflation, a weak government fiscal position, and a slower rate of economic growth.

India currently enjoys a stable rating of BBB- on it sovereign debt. However, it has been grappling with political gridlock and the government’s ability to implement measures to improve economic growth and fiscal prudence will be vital to boosting confidence, Ogawa had said. (NDTV)