The Indian budget, released on February 28, includes both positive and negative elements for the sovereign credit, says Fitch Ratings. The continuation of the structural reform process, and efforts to reduce infrastructure bottlenecks - as reflected in several items in the budget - is credit positive. Credibility is also boosted by the central government having met its FY15 budget deficit target of 4.1%, despite over-optimistic revenue targets.

However, the medium-term fiscal consolidation strategy has been loosened somewhat, which is credit negative. The lack of a more ambitious deficit reduction path will mean that India's debt burden-which is already high - will continue to be a rating and credit weakness. The central government is retaining its objective to achieve a 3% of GDP deficit over the medium term; however, this will now be reached a year later than planned, and FY16's deficit target has been raised by 30bp to 3.9%. Furthermore, if disinvestment were to be treated as a ''below the line'' financing item-as is international best practice-instead of a revenue item, the deficit target would be higher and rising-from 4.3% in FY15 to 4.4% in FY16.

The widening deficit target is particularly notable for India, given the country's relatively high public debt burden, which Fitch has long highlighted as a key credit weakness. Public debt is close to 65% of GDP, much higher than the 39% median for 'BBB' category sovereigns.

The FY16 revenue targets are generally more credible than in last July's intermediate budget, with the exception of a much larger disinvestment target than that achieved in FY15. The budget aims for tax revenue to rise by only 1.3% in nominal terms, which is modest. The tax revenue target reflects in part the government's strategy to focus more on additional benefits for the middle class as opposed to broadening the income tax base to generate greater revenue.

Part of the increase in the planned deficit is also linked to a significant rise in central government capex. Considering India's large infrastructure deficit, this is likely to have a direct positive effect on growth, while potentially crowding-in private sector investments.