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Unfavorable macro developments and policy slippages risk to India rating: Deutsche Bank

MUMBAI: A key risk to India's ratings outlook in the coming year or two could be the government inability to achieve fiscal consolidation, slowing growth, interest rate and exchange rate risk, said Deutsche Bank in its research report.

Global rating company Standard and Poor's on Wednesday lowered India's rating outlook to negative. It also warned of a downgrade in two years if there is no improvement in the fiscal situation and the political climate continues to worsen.

A key risk to India's ratings outlook in the coming year or two is that the fiscal adjustment envisaged in the budget is not accomplished due to unfavorable macro developments and policy slippages for instance a rise in the subsidy bill in the absence of administrative price adjustments,'' said the report.

If the slippage also reflects no medium term movement toward expanding the tax base through implementation of the GST, bringing more services under taxation, and improving compliance and expenditure restraint byimproved efficiency of social spending, the ratings outlook would invariably worsen,'' the bank said.

The recent presentation of the government of India's FY12/13 budget features an attempt to reduce the fiscal deficit by 0.8% of GDP to 5.1%. India's fiscal deficit, at the consolidated general government level, has averaged 7.5% of GDP in the past decade.

India has been growing very fast in 2008-07. However, now the growth momentum is not like before. It is difficult to say if this is due to structural difficulties or it's a cyclical issue,'' said Standard & Poor's credit analyst Takahira Ogawa in a conference call on Wednesday.

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