However, in its Asia-Pacific sovereign report card, S&P said the Budget is “likely to re-emphasis its resolve for fiscal consolidation, but spending plans would require better revenue generation capability.”

Observing that the overall fiscal deficit was better due to debt-swap with states, it said, “The central government is unlikely to meet its own fiscal rules of cutting the Budget deficit by 0.3% to 4.4% of GDP this fiscal.”

About growth, it said India’s economic numbers showed a mixed picture, but the underlying strength in the economy remains. “GDP for fiscal ending march 31, 2005 is expected to be about 6%,” it said, adding the country had potential to grow by 7% due to the gradual reforms undertaken.

Against strong contributions from industry and services and the weak farm sector in 2004-05, it said, “Some moderation is expected from industry and services, while a reversal in agricultural output is expected going into the next fiscal.”

Noting that the mid-year review of economy in December had highlighted the need to increase taxes and attract FDI, it said the dynamics of the coalition government would dilute some of these initiatives.

Noting that revenue deficit was higher than the target levels, S&P said “small improvements in the central government revenue are likely to be overweighed by expenditure plans and deterioration in states’ finances.”

It, however, said a plan for states’ value-added tax was the first step in addressing their “fragile” fiscal health.

The Reserve Bank had recently said sluggish non-tax revenues, lower non-development expenditure and allocation for health, education and infrastructure had deteriorated the financial health of states.

On wholesale price index (WPI) inflation, though S&P had seen a gradual decline due to lower food prices, it cautioned that “demand-led inflationary pressures are likely to persist, while credit growth is also likely to accelerate.”

As per the latest data, WPI inflation stood at a 10-month low of 5.01%, much lower than the RBI’s projection of 6.5% for 2004-05.

S&P also expects higher interest rates in the coming months, but said its effect on investment could be “muted” due to narrowing capacity utilisation.

It warned that current account surpluses turning into deficits might be accelerated with high imports, especially oil, and lower-than-expected invisible exports.

Stressing that remittances after the tsunami disaster could “temporarily distort” the current account, it said despite the weaknesses in the account, forex reserves, now nearing 130 billion dollars, were expected to climb.

“Any fallout from more acute interest rate and exchange rate changes, a slowdown in external demand and high oil price are unlikely to affect India’s external strength,” it said.

—PTI