Standard & Poor's Ratings Services said today that India's budget for the fiscal year ending 31 March 2013, would be mildly negative for the unsolicited sovereign credit rating on India (BBB-/Stable/A-3).

While the finance minister announced various fiscal reforms, the timing of the implementation of key reform measures such as the Goods and Services Tax (GST), Direct Tax Codes (DTC), and the targeted direct subsidy disbursement remains uncertain. In addition, India's deficit in the next fiscal year is likely to remain high, and uncertainty surrounds the path to subsidy consolidation and to lowering fiscal vulnerability to volatile commodity prices.

We believe India's nominal GDP growth will most probably exceed the ratio of general government deficits to GDP in the coming fiscal year. Based on our calculations, we expect India's debt-to-GDP ratio to fall to 74.7 per cent in 2012-2013, from 74.9 per cent in 2011-2012.

However, large government funding programs, with announced new market borrowing of Rs4.8 trillion, will put some pressure on the financial market. This could adversely affect economic recovery. India's weak fiscal position and large debt burden are some of the most significant constraining factors on our sovereign credit rating.

According to the budget, India's fiscal deficit will be 5.1 per cent of GDP in fiscal 2012-2013, compared with 5.9 per cent of GDP in the current fiscal year (2011-2012). Both metrics fall short of the 13th financial commission's fiscal consolidation targets of 4.2 per cent of GDP in the coming fiscal year and 4.8 per cent of GDP in the current fiscal year. The ratios are also lower than the government's targets in its five-year plan of 4.1 per cent in fiscal 2012-2013 and 4.6 per cent in fiscal 2011-2012.

With a general election likely in 2014, we believe that the chances of India achieving a central government deficit target of 3.0 per cent of GDP for fiscals 2013-2014 and 2014-2015 seem remote. We expect the deficit in the general government budget (including local governments) to remain high at about 8% in the coming fiscal year, compared with about 8.5 per cent in the current fiscal year.