Standard & Poor's (S&P's) Ratings Services has claimed India's 2010-2011 budget marks the country's first steps towards fiscal consolidation after two years of deteriorating finances.

In a statement, S&P's said it believes with increased certainty that the government can restore its financial soundness over the next several years will be key to improving the sovereign credit ratings on India (BBB-/Negative/A-3).

Takahira Ogawa, credit analystat S&P's, said: "For India, progress on fiscal consolidation is one of the most significant factors in our assessment of the sovereign credit rating. The Reserve Bank of India's handling of emerging inflationary pressure and the country's growth prospects over the next several years will also be important to stabilize the rating,"

India's fiscal problems include large outstanding debt and a deficit that has widened over the past two years. The budget aims to bring India's growth level back to 9% growth and addresses wealth distribution issues for low-income groups, particularly in rural areas, at the same as trying to reduce fiscal deficits.

The central government plans to reduce the size of its fiscal deficits for 2010-2011 to 5.5% from a revised estimate of 6.7% in 2009-2010. On the revenue side, partly because of the planned introduction of the nation-wide goods and service tax (GST) in the near future, there is no significant change in tax. However, the budget does include increases in some indirect tax rates, which were reduced to boost domestic demand in previous budgets. On the expenditure front, the budget includes an increase in capital spending in areas such as infrastructure investments, and gradual increases in the social security sector.

Prior to the budget speech, the government had changed its fertiliser policy to implement a nutrient-based pricing policy and will raise urea prices by 10% from April 2010. This should reduce the total size of fertilizer subsidies, which amounted to almost India rupee 1 trillion--including the issue of fertilizer bonds--in fiscal 2008-2009, or 45% of total government subsidies. However, S&P's believes further changes to the system of food and domestic fuel subsidies could improve the structure of expenditures and prevent future increases in the size of subsidies.

In S&P's view, India's fiscal consolidation will occur at a moderate pace. In a report tabled to parliament on 25 February 25 2009, the 13th Finance Commission recommended that the government take "a calibrated exit strategy from the expansionary fiscal stance of 2008-2009 and 2009-2010." The commission proposes a general government debt target of 68% of GDP in 2014-2015 from an estimated 79% in 2009-2010. It also proposed to bring down the general government fiscal deficit to 5.4% in fiscal 2014-2015 from an estimated 9.5% in fiscal 2009-2010. Based on this recommendation, the announced budget for 2010-2011 included a rolling target for the central government deficit, at 4.8% for 2011-2012 and 4.1% 2012-2013.

In S&P's view, one of the critical factors for India's fiscal consolidation will be the timing and the details regarding the implementation of the nation-wide GST system. And it said a successful implementation of the GST could pave the way for a structural improvement in budget revenues.