India had lost its investment-grade rating in September 2002 when S&P lowered the local currency to BB+ and the short-term credit rating to B. It had, however, retained its foreign currency rating at BB.

According to the rating agency, the direct debt of the centre and the states and the debt guaranteed by them add up to 95 per cent of the GDP. It said the consolidated general government deficit of 10 per cent of the GDP is one of the highest of all sovereigns rated by S&P.

It, however, says that a GDP growth rate of 5-6 per cent in the medium term and comfortable external liquidity sustained by burgeoning foreign exchange reserves will help cushion the impact of the widening fiscal deficit.

S&P says the outlook could be revised to stable if the country plugs a leaky tax system and implements legislation to control fiscal deficit that will slow the growth of public debt. It has also recommended "full implementation of value-added tax and cost-recovery of public services, especially energy" to help improve the country's outlook.