India's fiscal consolidation has been interrupted by a sharp increase in subsidies, populist spending ahead of elections and an increase in the public wage bill. If past reductions in government debt ratios--still well above rating peer group medians--are definitively reversed, the sovereign's local currency would likely be downgraded from the current stable outlook. Fitch Ratings (July 15, 2008)

India's credit profile has worsened in the past 12 months, but we believe the upside and downside risks to its BBB- rating are currently balanced. This assumes, however, that the reasons for credit deterioration are temporary. If we conclude that they are longer lasting, the ratings on India could be lowered again to speculative grade. Standard and Poor's (July 10, 2008)

Different global organisations. Similar gloomy outlook. And veiled threats of a downgrade. The Indian growth story is fast starting to crumble, as more and more bad news piles up. Although neither Fitch nor Standard and Poor's are ready to give any time-table for the downgrades, the threat, they say, is very real. A steady deterioration in the country's fiscal health because of a combination of adverse national and international factors is really at the core of such a decision.

Takahira Ogawa, Primary Credit Analyst at Standard and Poor's, explains: "We had originally estimated the consolidated general government deficit (including state government deficits, oil and fertiliser subsidies, and other off-balance sheet expenses) at 6.5% of GDP for 2008-09. However, with the impact of additional expenditure such as farmers' debt relief, higher oil and fertiliser prices, and the partial implementation of the Sixth Pay Commission, we now estimate the deficit could exceed 9% of GDP.''

The country's rating will depend on the Centre's ability to manage the fiscal challenges that threaten to undermine public finance gains in the short run, says Ogawa. Adds James McCormack, Chief Analyst, India Sovereign Rating, Fitch Ratings: "We expect weaker Indian economic growth, a more uncertain policy outlook and changes in global investor risk appetite to result in lower capital inflows and revenues in FY09.'' Fitch has already lowered its outlook on local currency rating to negative.  

Incidentally, any downgrade of its sovereign rating--Fitch has already changed its outlook--will mean that India will slip from the investment grade to speculative grade. However, the more important question is what such a downgrade could mean for an economy battling high inflation and interest rates, and worsening fiscal and current account deficits.

The ramifications