However, Fitch notes that the reform agenda has been carried forward somewhat, as the long-delayed state level VAT is expected to be introduced in 2005 / 2006. Fitch's current 'rating outlook for India is 'stable'.

Shelly Shetty, Fitch analyst on India, said, 'We are disappointed that the government has largely ignored the opportunity for faster fiscal consolidation at a time of higher growth.' Surpassing the targets set by the Fiscal Responsibility and Budgetary Management Act (FRBM) would have boosted investor confidence significantly, as it would have reflected the government's ability to pursue a more aggressive front-loaded fiscal consolidation process.

Instead, the authorities have used the excuse of greater transfer of resources to states (as recommended by the Twelfth Finance Commission) to put on hold the deficit-reducing provisions of the FRBM in 2005/2006, which does little to improve the credibility of this act. The fiscal deficit target of 4.3 per cent of GDP for 2005 / 2006 is quite unambitious, especially when growth is expected to remain close to 7 per cent.

This, in turn, raises concerns about India's fiscal situation when growth falters, especially as the Indian economy is unlikely to sustain 7 per cent - 8 per cent growth in the absence of significant fiscal correction. In addition, in the absence of significant fiscal consolidation in 2005/2006, it will be more challenging for the government to eliminate the revenue deficit by 2008/2009 as set by the FRBM.

On the positive side, Fitch is encouraged that the government is set to undertake an important rationalisation of the indirect tax system by announcing the implementation of the statewide VAT system from April 1, 2005.