India's credit standing internationally is now just a notch above junk. Credit rating agency Standard & Poor's (S&P's) on Tuesday lowered the outlook on India's sovereign rating from 'stable' to 'negative', citing a deteriorating fiscal situation and a challenging economic environment, made worse by profligate spending by the government. 

A downgrade would be bad news for Indian companies, who would have to pay higher interest rates on their overseas loans, since rates are pegged to country ratings. The stock market, too, will feel the pinch, as the world's big pension funds and risk-averse investors will move to relatively safer markets. S&P, however, maintained the current long-term sovereign rating at BBB- and the short-term rating at A-3 (both reflecting 'investment grade'), indicating there was still some leeway for the government to work its way out of the fiscal mess. 

"We think there's still a possibility that India can improve its fiscal position and avert a rating downgrade," S&P's credit analyst Takahira Ogawa told DNA. "If we didn't think so, we would have downgraded it right now." 

But even as he said that, the Union government was announcing a Rs 30,000 crore stimulus package involving a 2% reduction in excise and service tax. This could bring fetch us a downgrade faster than anticipated. 

The latest outlook revision reflects S&P's view that the fiscal position "has deteriorated to a level that is unsustainable in the medium term." The fiscal slippage highlighted in the government's interim budget presented last week "reverses the consolidation trend and calls into question the government's commitment (to consolidation)," it noted.

Venkatesan Vembu & Joel Rebello/ DNA-Daily News & Analysis Source: 3D Syndication