NEW DELHI S&P credit analyst Takahira Ogawa listened politely as officials at the finance ministry made an hour-long pitch for a ratings upgrade, citing economic growth prospects, revenues and their efforts to contain the government's fiscal deficit.
At the meeting two weeks ago, officials argued that tax returns were rising and debt levels were on the decline compared to gross domestic product, two officials who were at the meeting told Reuters.
Singapore-based Ogawa gave no sign of what he was thinking - and could not immediately be reached for his version of events - but evidently he left unconvinced.
On Wednesday, the ratings agency cut its outlook on India's BBB- rating to negative from stable and warned it had a one-in-three chance of losing investment-grade status, sending shockwaves through the ministry. Its decision could raise costs for Indian borrowers and undermine foreign investor confidence in Asia's third-largest economy.
"We were not expecting this downgrade," one senior adviser at the ministry said.
The misplaced optimism before the cut suggests the finance ministry may be out of touch with opinion among private economists, investors and even the Reserve Bank of India (RBI) about the faltering economy. But it also reflects the view in New Delhi that India is unfairly saddled with a low sovereign rating.
In February, the finance ministry's chief economic adviser Kaushik Basu complained that India's fast growth was not reflected in global agencies' ratings. "In relative terms, India has become a better investment destination," Basu said.
As the news broke, top finance ministry officials huddled in their offices, eyes glued to monitors and television screens for signs of an investor exodus from the markets.
"The initial reaction was all of us turned on our TV sets to see what is happening in the stock market," the senior adviser at the ministry said. Shares dropped more than 1 percent in the immediate aftermath but recovered to close down 0.33 percent.
Finance Minister Pranab Mukherjee's first public comment on the cut - "don't panic" - seemed aimed as much at his own ministry as at the general public.
While the shock news was a wake-up call, officials say the best they can do for now is take incremental steps aimed at restoring confidence in the India story.
India has lost some of its shine recently. After growing at an enviable average rate of more than 8 percent annually for the previous five years, it expanded less than 7 percent in the last fiscal year, its slowest pace in three years.
The same 2011/12 fiscal year, which ended March 30, saw its current account and fiscal deficits blow out way beyond targets because of a growing bill for subsidies, mainly of fuel, and soaring oil and gold imports.
"If we are able to keep our budget targets on track, it would improve our credibility in the market, and may encourage the rating agency to reconsider its decision," said a finance ministry official, who declined to be identified because he was not authorised to speak to the media.
The S&P cut added force to an avalanche of criticism about the government's economic management. Earlier this month, Prime Minister Manmohan Singh sat silently as a panel of his peers, including the RBI governor, told him lack of progress on economic reform had left the economy in disturbing shape.
"The broader message for everyone in the government is that we need to move a little faster and a little quicker," said Dipak Dasgupta, the finance ministry's top economist.
"We might hurry along a little bit given that everyone seems to think that we need to hurry. Fine, so we will do it."
WE'RE NOT TUNISIA
S&P ratings for India are the lowest for any of the so-called BRICS - Brazil, Russia, India, China and South Africa - grouping of emerging economies that are reshaping global power.
Indeed, some analysts speculate that India is at risk of being replaced in the BRICS ranks by Indonesia, whose credit ratings were recently upgraded to investment-grade. S&P's warning effectively says India's rating is at risk of slipping to "junk".
Policymakers in India see their country as a superpower-in-the-making after 20 years of fast growth and it clearly rankles with some officials that S&P considers the economy as risky as those of some Central Asian and North African republics.
"We made the presentation arguing India's growth prospects, tax-GDP ratio, efforts to fix the fiscal deficit, are quite genuine and deserve better ratings than countries like Tunisia," said an official who was involved in the presentation to S&P.
Dasgupta, who recently travelled to Tunisia, also said it was unfair to club India together with an economy in tatters after last year's revolution.
The officials reminded Ogawa that India was still growing faster than any other major economy apart from China.
But sceptics say India is politically unable to take major steps to rein in ballooning subsidies, now more than 2 percent of GDP. Private economists also say the government will struggle to rein in its current account and fiscal deficits and revive GDP growth while world energy prices are high, and with a period of election spending looming.
PRAY FOR RAIN
Everyone from the finance minister to the RBI governor agree the most urgent step is to cut subsidies on fuel, especially diesel, which some officials say will happen in May. But the move is unpopular with the opposition and the government's coalition partners and has long been delayed.
Officials said India plans to take incremental steps to support projected growth and trim its fiscal deficit to 5.1 percent in the current year while - as one minister put it - "praying for good rainfalls and stable crude oil prices".
One measure likely to take effect soon is a duty on gold imports, likely to be passed in parliament in May and projected to cut gold imports to 1.7 percent of GDP from 2 percent last year. India imported gold and silver worth $60 billion in 2011/12, pushing up the trade deficit to near $185 billion.
Officials also tout recent moves to lift exports of sugar, grains and cotton to boost farm growth and foreign exchange, and point to a jump in approvals for infrastructure projects as the prime minister focuses on supply bottlenecks.
But hurt by corruption scandals and held back by rebellious coalition partners, it is far from clear that Singh will be able to deliver enough reform to improve perceptions.
"The real issue in India is not that the problems are unknown or that the solutions are unclear; it is that solutions are not being implemented," said Rajeev Malik, a senior analyst at CLSA Singapore. "That is unlikely to change substantially."
(Writing by Frank Jack Daniel; Editing by Tony Munroe and Catherine Evans)