The agency has kept long-term rating outlook "negative"

Standard & Poor’s (S&P), the global rating agency, on Thursday, warned India that its sovereign rating would be lowered from the current outlook of “negative” within a year if the “policy drift” continued.

The outlook on the long-term rating remains “negative”.

“The negative outlook indicates that we may lower the rating to speculative grade next year if the government that takes office after the general election does not appear capable of reversing India's low economic growth,” said S&P in a release. S&P had downgraded India’s rating to “negative” last April .

Barring an unexpected deterioration of the fiscal or external accounts before the election, “we expect to review the rating on India after the next general elections when the new government has announced its policy agenda,” it added.

However, it said: “if we believe that the agenda can restore some of India's lost growth potential, consolidate its fiscal accounts, and permit the conduct of an effective monetary policy, we may revise the outlook to stable.”

The rating agency’s affirmation of the current rating rests on several key strengths of India, including a robust participatory democracy of more than 1 billion people and a free press; low external debt and ample foreign exchange reserves; and an increasingly credible monetary policy with a largely freely floating exchange rate.

However it said that these strengths were counter-balanced by significant weaknesses, which included an onerous burden from its public finance, lack of progress on structural reforms, and shortfalls in basic services “typical of a nation with a GDP per capita of US$1,500.”

Achieving the government's own fiscal deficit target of 4.8per cent of GDP in fiscal 2014 would depend partly on the government's resolve on the level of election spending and on the evolution of commodity prices.

``The central government's budget balance, however, tells only part of the Indian fiscal story,’’ said S&P. Using a broader measure of general government deficits, the rating agency projected a 7.2 per cent of GDP deficit for fiscal 2014, to which one should add 1-2 percentage points of GDP deficits for the unprofitable portions of the consolidated public sector, including state electricity boards and oil-marketing companies.

The rating agency said that the Indian government had sent mixed signals on subsidy policies.

“The government has secured parliamentary approval to expand coverage of food subsidies to almost two-thirds of India's households. This act could almost double the size of the government's food subsidy in future budgets to about 1.5 per cent of GDP,” it pointed out.

The new government would face the difficult task of placing its fiscal accounts on a firmer footing: phasing out of diesel subsidies, financing the expansion of food subsidies, addressing other subsidies such as those for fertilizer, and introducing the nationwide rollout of a common goods and services tax.

Current account deficit

It also said that current account deficit (CAD) would narrow slightly to about 3.7 per cent of GDP by March 2014, mainly because of government restrictions on the import of gold and weaker domestic demand. India's CAD widened significantly in 2013 to about 5 per cent of GDP, the highest in more than a decade, which had seen deficits more in the range of 1-2 per cent of GDP.

The deterioration of the current account and changing perceptions about global liquidity conditions weakened confidence in the rupee, leading to a 22 per cent fall in its value against the dollar between May and August this year.

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