US credit rating agency Moody's on Wednesday hit the Indian government hard for not doing enough on the reforms front. It said, "The single biggest factor weighing on the (economic) outlook is the Indian government."
The comment followed another rating firm, Standard and Poor's (S&P), lowering India's credit outlook to negative, raising questions over the economy that had taken a hit by borrowings, rising imports and political compulsions stalling key reforms.
The agency maintained India's rating at BBB-, which is just a notch above "junk" that carries a higher risk of default by the government, but warned that it might downgrade the rating in the next two years if the fundamentals worsened.
"We expect only modest progress in fiscal and public sector reforms given the political cycle with the next elections to be held by May 2014 and the current political gridlock," S&P said in a statement.
Later, Moody's Analytics senior economist Glenn Levine said in a commentary: "In all economies it is impossible to separate the economic from the political outlook, and that is particularly the case in India."
The government moved quickly to soothe the nervous markets with reassurances on the economy's strong fundamentals.
"I am concerned, but I don't feel panicky because I am confident that our economy will grow by around 7 %, if not plus. We will be able to control fiscal deficit and it will be around 5.1%," finance minister Pranab Mukherjee said .The opposition spared no punches. "The consequences for the Indian economy are very grave. Investor confidence in India could decline further. International borrowings will become costlier," said BJP leader Arun Jaitley.
Industry leaders, too, called for urgent reform measures to boost investor sentiment. Chandrajit Banerjee, director general, Confederation of Indian Industry, said, "The government must take measures to push for reforms especially in the areas of foreign direct investment (FDI), goods and services tax and direct taxes code."
He said, "Further opening up India in sectors such as aviation, Insurance and opening up multi brand retailing will help improve foreign capital inflows and also improve investors' sentiment."