Giving a mixed reaction to the Indian Budget, international rating agency Fitch Ratings said the Congress-led government's proposals to consolidate the fiscal accounts "bode well" even as it warned about the high fiscal deficit.

"While the government's plan for fiscal consolidation in the medium-term is encouraging, we are disappointed that the government did not use the opportunity presented by high growth to consolidate public finance more aggressively," its analyst on India Shelly Shetty said.

The Budget proposals for 2004-2005 target a fiscal deficit of 4.4 per cent of GDP, representing a small adjustment from the estimated 4.6 per cent for the previous fiscal.

Fitch at present assigns "BB+" rating and says the rating outlook is stable.

The Budget, it notes, increases spending on rural, education and health sectors while balancing this against the need to control the stubbornly high fiscal deficit.

The Budget projections are based on a "slightly optimistic growth assumption," Shetty said, adding that the ability to achieve the fiscal target will be very dependent on meeting the revenue targets, with tax revenues projected to grow robustly at 25 per cent.

"Although corporate and income tax rates remain unchanged, higher revenue is expected from the 2 per cent education cess and the extension of services taxes," Shetty said.

While increasing the coverage of services tax is a step in the right direction, there is still wide scope for broadening the tax net on services, given that it represents only 5 per cent of the total tax intake," she said.

Fitch said it is also encouraged by the fact that the government has set a deadline for the implementation of a state level VAT.

"Implementation of VAT would represent a significant structural improvement that should enhance the efficiency of indirect taxes as well as boost revenues in the medium term," it added.

Noting that the government has announced its intention to revisit the broader tax reform issue in the next Budget, the agency said it will closely monitor to see how far future measures reflect the recommendations of the Kelkar Committee.

"Inability to move on a broader tax reform next year will increase pressures on public finances should growth falter and interest rates move up," it said.

Fitch welcomed the government's announcement to increase investment in the agriculture sector, liberalise restrictions on FDI in certain sectors as well as de-list selected activities reserved for the small scale industry.

"However, these measures are still insufficient to significantly boost foreign direct investment, which at 1 per cent of GDP is clearly inadequate for India's development needs. Not surprisingly, the privatisation target was scaled back, reaffirming the government's strategy of not privatising profitable public sector enterprises," it added.

Fitch said no real steps were taken to reduce subsidies, although a blue print is to be prepared to improve the targeting of subsidies.

However, Fitch believes that the scope for reducing subsidies is substantial.

"Greater focus on selective phasing out of subsidies in the coming years will be critical to enable the government to devote more resources to development expenditure," it said.
 
The government, it said, has also refrained from cutting the above-market interest rates on small saving instruments, thereby halting the trend seen in recent budgets.

"Higher returns on these instruments will put further burden on the public finances and also reduce the effectiveness of monetary policy."

Overall, the agency said it is encouraged that the new government has displayed an appropriate degree of fiscal responsibility and has not succumbed to populist spending pressures in its first Budget.

However, the administration should not allow the opportunity for greater fiscal consolidation afforded by strong real GDP growth to slip away, it added.