Global rating agency Standard & Poor's on Monday affirmed India's local currency rating of 'BB+ negative/B' and foreign currency rating 'BB negative/B', respectively, saying the action was constrained by rising public debt and growing fiscal inflexibility.

Painting a negative outlook for the economy, S&P said: "The government's debt burden may continue to rise rapidly over medium term, especially if the gross domestic product were to decelerate."

Steps like full implementation of value-added tax, and better cost recovery in public services, especially energy, could result in the outlook being revised back to stable, it said.

The inability of country's political class cutting across all parties, to re-ignite reform, failure to liberalise land and labour markets and reservations of certain items for small scale industries, constrain country's macroeconomic growth, it said.

Pointing certain strengths of the economy, S&P said comfortable external liquidity was sustained by growing foreign exchange reserves (exceeding 900 per cent of short term debt) and modest debt service payments.

S&P said India was likely to achieve a 5-6 per cent GDP growth in the medium term, which could help cushion its high fiscal deficit and contain the heavy government debt burden.

Turning to public sector programme, S&P said although deregulation and privatisation are slowly taking place, public sector reform were yet to start.

S&P said the stronger political leadership on economic matters could restore policy momentum and confidence, putting GDP growth on a higher and more sustainable path.

Aggressive tax reform and implementation of proposed legislation to control fiscal deficits could control the growth of public debt, the rating agency said.

The growing dynamism of the private sector contributes greatly to improving current account earnings and external liquidity, and should continue to thrive.

Conversely, public finances might continue to weaken, owing largely to a leaky tax system, low user charges for public services and a bloated public sector, it said.

Central government revenues, which declined to 9.5 per cent of GDP in 2002 from 10.1 per cent in 1991, may not recover significantly in the coming years to fund growing spending pressures, it added.