It means that you shall be derided and looked upon with suspicion for the length of time you are downgraded. No matter how serious your injury there will always be that implied look that you are pulling a fast one and simply a lazy fat biff.
This goes double for ladies or if you have a "back problem".
Downgrading can still allow you to deploy on operations but not in Frontline Combat roles (if you are a trained soldier). I'm currently graded as a P3 which is a downgrade and will not be upgraded due to my condition. But am awaiting mobilisation for Herrick 10. I'm also incidently a TA soldier.
Downgrading means that you have some kind of medical problem with potential to affect performance, or requiring medication. It can be temporary (often P3) or more long-running (P7).
What it stops you doing is based on your risk assessment. If it's minor, it may not stop you doing anything at all, if it's major you could be on home duties only. It isn't the grade that blocks anything, however, but the risk assessment from your PC, RMO and Occupational Medicine.