MUMBAI -- Rating agency Standard & Poor's said Wednesday India's federal budget hasn't eased concerns on the government's fiscal deficit and it may lower the country's sovereign rating if fiscal consolidation is delayed.
"We continue to believe that such high levels of government deficits are unsustainable in the medium term, although we weren't surprised by the number itself," S&P said in a statement.
Monday, federal Finance Minister Pranab Mukherjee said that the fiscal deficit for the financial year through March 2010 is likely to be 6.8%, sharply higher than 5.5% estimated in the interim budget in February.
S&P estimates the total deficit of the federal and state governments and after considering off-budget items such as fertilizer and oil bonds to be about 12% of gross domestic product.
India currently doesn't include in the budget the bonds given to fertilizer producers and state-run oil companies to compensate them for selling products below market price.
S&P currently has a BBB- rating - its lowest investment grade rating - on India with a negative outlook. Any downward revision will reduce the rating to junk grade, which will affect foreign investors' interest.
The agency said that it may raise the rating outlook to stable if India achieves fiscal consolidation over the next two to three years.
A strong economic recovery and medium-term growth prospects will help faster fiscal consolidation through higher revenue and lower expenditure growth, it said.
But, higher inflation and interest rates could increase the cost of borrowing and affect the size of deficit.
"A material deterioration in India's strong external position - considered unlikely at this stage - could also put pressure on the ratings," the agency said.
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