"Government debt is the main obstruction in the path of further improvements in India's credit ratings, and stands out in contrast to the many positive economic indicators displayed by India in recent years," said S&P's credit analyst Ping Chew. The combined central and state government deficits will amount to 10 per cent of the gross domestic product (GDP) in the near term, leading the consolidated debt of the central and state governments to rise gradually for the next few years from more than 80 per cent of GDP currently.

"The 2005-06 budget does not provide for any significant reduction in the fiscal deficit, following a rather modest reduction in the previous year," he added.

"Given the strong growth being experienced by the Indian economy, it is surprising that better progress could not be made. Conversely, it must give rise to worries concerning India's future fiscal performance should growth rates become less favorable," he noted.

According to S&P the budget should also be seen in the context of its track record, where budget forecasts were missed in four of the past five years. The rating agency also referred to the political dynamics, especially due to the government's minority representation and some of the proposals are liable to change.

The positive aspect of the budget is the emphasis given to infrastructure spending and tax reform. Likewise, the solid 21 per cent growth in taxation revenue in 2004-05, and an expected growth of similar proportions this year, must be regarded positively in relation to India's ability to service its debt burden. For example, in 2003-04, interest expense took up 47 per cent of central government revenue, while in 2005-06 the ratio is expected to fall to 38 per cent, S&P noted.