Political uncertainty and delay in critical reform measures are the two key factors that could adversely affect India?s investor-confidence and growth potential in the short run, international rating agency, Standard & Poor?s said in its report released Wednesday.
However, medium-term growth prospects remain intact as changes in governments over the past decade have not detered or derailed the economy from its strong growth trajectory path, it said.
According to the report, inflation still remains a risk as the Reserve Bank of India continues to grapple with a high level of excess liquidity in the system, record high international oil prices, and rising local commodity prices, all of which could threaten its inflation target of 5% this fiscal year.
It has been a mixed year so far for India after its long-term rating was raised to investment grade in January.
The central government?s budget deficit for fiscal 2006 (year ending March 2007) came in at 3.5% of GDP, below the official target of 3.8% of GDP.
This keeps the sovereign?s medium-term fiscal deficit targets of 3.3% of GDP for fiscal year 2007-2008 and 3.0% of GDP for fiscal year 2008-2009 intact.
However, focus now is on whether the fiscal gains made over the past few years could be unraveled by the Sixth Pay Commission which will submit its report in April 2008.
Encouragingly, inflation has fallen to 3.3%, a near five year low in early-September, from a two-year peak of 6.7% in late January.
The central bank had already raised the cash reserve ratio by another half a percentage point to 7% in late July 2007.
This was followed up on by drastically reducing the limit on external commercial borrowings in early August from the previously permitted $500 million to a mere $20 million, in an effort to manage this excess liquidity.
Although some concerns have cropped up as India?s industrial production grew at the slowest pace in nine months in July, growth is still expected to come in at a relatively high 8.5%-9.0% this fiscal year versus 9.4% last year.