Credit rating agency Standard & Poor's (S&P's) on Tuesday lowered the outlook on India's sovereign rating from 'stable' to 'negative', citing a deteriorating fiscal situation. 

With "high government debt burden and deficits", India's "weak fiscal profile" has been the single "largest negative factor" for the sovereign ratings on India, it added. In the interim budget unveiled by Pranab Mukherjee on February 16, the government disclosed that the fiscal deficit - the gap between revenues and expenditure - had risen to 6% of GDP from the 2.5% projected in February, 2008. And this figure excludes the off-budget subsidies of Rs 95,942 crore for oil and fertiliser companies.

Tuesday's stimulus package, apart from worsening the fiscal situation still further, has been described by some economists as a "bad idea". "Fiscal measures have a cost when the deficit numbers are way off target and may go off further in 2009-10," said Bibek Debroy, professor at the Centre for Policy Research in Delhi. "The government could have waited for the effect of the previous monetary policy measures to show up."

Ogawa of S&P said that a rating review would hinge on a post-election government's fiscal policies, and, in particular, "whether and to what extent it uses its financial assets". If the next government divests its holdings in state-owned companies, that would improve its fiscal position, he noted. 

But it would depend on external factors, such as the recession's impact on India. "The issue is how deeply the Indian economy will tank. If the pace of growth reduction is faster, there will be more pressure on the government to increase expenditure, with implications for fiscal deficit."

Venkatesan Vembu & Joel Rebello/ DNA-Daily News & Analysis Source: 3D Syndication