India's federal budget represents a strong intention to renew fiscal discipline, which coupled with a fuel price increase announced on the same day are positive for its sovereign rating, Moody's Investor's Service said on Tuesday. Finance Minister Pranab Mukherjee on Friday trimmed some of last year's heavy economic stimulus and said the government plans to cut the fiscal deficit to 5.5 percent of the GDP from 6.9 percent this year.

Moody's rates India's local currency sovereign rating as Ba2 and assigned a positive outlook in December 2009. "Alongside a rebounding economy, a well-calibrated exit strategy from its stimulus measures if complemented by medium-term fiscal consolidation ... will facilitate a reasonably rapid rate of debt reduction to 70 percent of GDP in 2-3 years, down from the current 78 percent," said Aninda Mitra, vice-president- senior analyst at Moody's.

The petroleum ministry raised gasoline prices by 6 percent and diesel prices by 7.75 percent on Friday after the finance minister increased factory-gate taxes and import duties on the fuels in the budget on Friday. Moody's expects the combined fiscal deficits for the central government and states to narrow to 8 percent of GDP from 10 percent in the current fiscal year, he added in the note.

Even though the government's fiscal consolidation efforts could run into headwinds from political opposition or external shocks, the programme stands a strong chance of remaining on track, Mitra said. "...forthcoming adjustments to fuel price subsidies or a rationalization of the underlying subsidy mechanism itself would also be credit positive," he added.

Receipts from the expected auction of 3G licenses and acceleration of divestments combined with the implementation of goods and services tax in April 2011 will also support overall fiscal consolidation, according to the note.