India sovereign rating faces risk on fiscal strain: Deutsche Bank

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

Deutsche Bank expects the deficit in 2012-13 to be marginally higher at 5.3% 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.

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% of GDP.