India's rising of the fiscal deficit, seen at 6 per cent of GDP at end 2008-09, might lead to downgrade of the country by international ratings agencies. The fiscal deficit for the current year is far higher than the initial target of 2.5 per cent. For the year 2009-10, it is expected to be 5.5 per cent.
 
Both Standard & Poor's and Fitch Ratings have already indicated that they are likely to lower the country's credit rating. Takahira Okawa, a senior analyst at S&P, said they plan to to review India's domestic debt rating after the government's interim budget forecast increased borrowing and a higher fiscal deficit.

Rising outstanding union government federal debt and a worsening fiscal deficit outlook were worrying factors, Takahira Ogawa a senior analyst at S&P, told interviewers.

"The federal debt as a percentage of GDP and the rising fiscal deficit are two significant factors which are constraining ratings and that is something which also may pull them lower," he said, after the budget was presented.

Standard and Poor's currently rates Asia's third-biggest economy's local currency rating at BBB- (minus), the lowest investment-grade level, with a stable outlook. Fitch has a similar rating but with a negative outlook, while Moody's pegs it at one notch lower at speculative grade.

India's fiscal deficit is one of the highest in the world and the two stimulus packages announced in recent months to shore up sagging growth have put pressure on finances, while tax collections have slowed sharply.

"Already, the revised estimates show it at six per cent of the GDP and then next year, it will not come down," said Okiwara. He feels the deficit could go up further depending on the next government's fiscal policy. ''All in all, the direction of the fiscal position of the Indian government is getting worse," he said.

Also, on the state level, partially, because of the implementation of the Sixth Pay Commission's pay rise, this year the fiscal deficit of the state governments level would increase. Okiwara said that thanks to India's foreign exchange reserves and a stronger rupee, its foreign position might not be too much of a problem. But it would be more so on the domestic side.  

Meanwhile, a senior analyst at Fitch Ratings said in Mumbai that India's fiscal condition is a serious weakness for its sovereign ratings. "Fitch considers the public finance position of India to be a serious ratings weakness," James McCormack, the head of Asia-Pacific sovereign ratings, told Dow Jones Newswires. Fitch currently has a BBB- local currency rating for India, with a negative outlook.

McCormack said the Indian government is likely to spend more through fiscal stimulus programmes to respond to weakening economic prospects. However, he said deficit for the fiscal year 2009-10 is likely to benefit from lower commodity prices.

Other analysts agreed. Said Saurabh Nanavati, chief executive officer of Religare AMC, ''The interim budget has turned out to be a damper for the market, which was expecting industry sops and lesser fiscal estimates. Any further fall in indirect and direct revenue collections by the government may force rating agencies to downgrade India.''

Poor corporate performance is seen as the main reason for low revenue collections by the government. ''In order to push up their topline, companies are bound to take hits in their bottom line. This results in lower payment of direct and indirect taxes,'' pointed out Waqar Naqvi, chief executive, Taurus Mutual Fund.

Ravi Sankar, banking analyst at Antique Broking, said, ''The downward risk to GDP estimates will increase chances of fiscal deficit ending up to be more than 6 per cent by the end of FY 2009. Hence, chances of re-assessing India's situation by rating agencies are high.''