India's medium-term growth prospects are strong, but fiscal consolidation could be delayed because of the uncertain near-term economic conditions, says Standard & Poor's credit analyst Takahira Ogawa.

"It will be difficult for the government to implement very strong fiscal consolidation measures this year because it would come in the way of an economic recovery," Ogawa told DNA Money on the phone from Singapore on a day the rating agency lowered the outlook on the long-term sovereign credit rating on India from 'stable' to 'negative'.

"Fiscal consolidation in the true sense may only start in the next fiscal year," he said.

Ogawa said general government deficit, including off-budget measures such as oil and fertiliser bonds, are likely to increase to 11.4% in the current fiscal, from 5.7% last fiscal.

Policy measures such as debt relief for farmers and a pay hike for government employees "increase stress" on the government's fiscal position ahead of the general election, he said. "We expect the deficit to remain high at 11.1% in fiscal 2009-2010. The fiscal deficit could widen if the next government implements another stimulus package."

Nikhilesh Bhattacharyya, associate economist, Moody's Economy.com feels India's policymakers are pushing spending plans to the limit despite the fact that the country already faces a large fiscal deficit. "Although governments the world over are announcing large spending measures to ensure their economies soft-land amidst the sharp global downturn, India is in a slightly awkward fiscal position," said Bhattacharyya.

According to him, ramping up spending could prove problematic with revenues likely to wane as the economy slows, pushing the fiscal deficit towards unsustainable levels.

A large fiscal deficit could also pose problems for the banking sector, with a wide funding gap forcing the government to issue large amounts of debt, pushing up India's risk-free interest rate and depressing the price of government bonds, of which large volumes are held by banks.

Ogawa, however, noted that India's external position was expected to remain resilient. "Despite continued dislocation of international capital markets, confidence in India is bolstered by its foreign reserves equal to 374% of short-term external debt."

"India has been through the ups and downs of the macroeconomic environment and fiscal position," said Ogawa. "Overall, the government has been honouring its debt payment obligations on time." Additionally, India has a reasonably developed financial market, which frees the government from having to depend on the international market."

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