Credit rating agency Standard & Poor (S&P) maintained the current long-term sovereign rating of India at BBB- and the short-term rating at A-3, indicate there was still 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 Rs30,000 crore stimulus package involving a 2 per cent reduction in excise and service tax. This could 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.

Ogawa said that a rating review would hinge on a post-election government's fiscal policies, and, in particular, "whether and to what extent it uses its financial assets". 

If the next government divests its holdings in state-owned companies, that would improve its fiscal position, he noted. But it would also depend on external factors, such as the impact on India of the global recession. "The issue is how deeply the Indian economy will tank. If the pace of growth reduction is faster than we think, there will be more pressure on the government to increase expenditure, with implications for the fiscal deficit."

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