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Standard & Poor's Thursday warned that India could slip from investment to junk grade after the general election due next year if the government that takes office does not appear capable of reversing Indias low economic growth.
The largest global credit rating agency retained, for now, the sovereign credit rating for India at the bottom rung of investment grade but with this negative long-term rating outlook.
The S&P action comes just days after a Goldman Sachs research report said politics is now trumping economics and expressed optimism over a possible political change, led by the BJPs prime ministerial candidate Narendra Modi coming to power.
The implications for India of a ratings downgrade would be difficult.
Once India loses its investment grade there could be a flight of capital from the country as overseas pension and insurance funds, which invest in a debt market only if it enjoys an investment grade, will pull out.
The sovereign credit ratings issued by S&P points out that India has several key strengths like a robust participatory democracy and a free press, a low external debt and ample foreign exchange reserves plus an increasingly credible monetary policy with a largely freely floating exchange rate.
But these strengths are counterbalanced by significant weaknesses, it says.
These include an onerous public finance load, lack of progress on structural reforms, and shortfalls in basic services typical of a nation with a GDP per capita of $1,500.
The detailed analysis points out that real per capita growth had averaged more than 6 per cent annually from FY 04 to FY 11. But growth has slowed steadily since then to half that level, fraying the social contract and putting at risk the declining trend in government debt.
The rating agencys comments sent the rupee down to a five-week low of 62.41 to a dollar compared with 62.39 Wednesday. it fell to a low of 62.73 in intra-day trade, its lowest since September 30. S&P added that the challenges for the new government will include placing its fiscal accounts on a firmer footing, phasing out diesel subsidies, financing the expansion of food subsidies, and introducing the nationwide common goods and services tax.