No negative rating but slowdown, policy risks remain:Deutsche to India

India may not face a negative ratings action this year but risks remain from a further slowdown in growth and policy slippages, Deutsche Bank said in a note on Thursday.

The bank also said the government needs to rein in spending and move towards tax reforms, particularly the goods and services tax, and expand the tax base to improve the fiscal situation.

The government has targeted a fiscal deficit of 5.1 percent of GDP in the financial year starting April and aims to prune its subsidy burden to below 2 percent from about 2.5 percent.

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Deutsche Bank expects the deficit in 2012/13 to be marginally higher at 5.3 percent of the gross domestic product.

“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,” the bank said.

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However, a turnaround in the global environment in the last few months is likely to help India’s growth outlook and prevent a ratings downgrade.

“If growth recovers somewhat and inflation does not soar again, the lack of structural improvement in the fiscal position need not be an immediate spoiler of the ratings outlook,” the report said.

Earlier this week, ratings agency Moody’s said the budget was credit negative for sovereign and lacked new solutions to address the country’s fiscal constraints.

Separately, Citi projected revenue and expenditure slippages in 2012/13, which could push the fiscal deficit to 5.5 percent of GDP.

Reuters