International rating agency Standard & Poor's on Monday said India's rating can improve if the new government reduces fiscal deficit and continues reforms to maintain a high economic growth.

S&P, which pegged India's GDP growth at 6.0 per cent for this year compared to 8.0 per cent last year, also said the Budget for 2004-05 will be a 'litmus test' for Congress-led United Progressive Alliance government.

"A better fiscal performance, along with structural reform to maintain country's growth prospects and its strong external profile could lead to an improved foreign currency rating," S&P director Ping Chew said in a statement.

The government's ability to improve the fiscal situation and deepen structural reforms will be key factors for the foreign currency now at 'BB' with stable outlook and local currency rating of 'BB+' with a negative outlook, he said.

"The new government's signals on policy orientation have been mixed thus far, but are less alarming than initially feared," Chew said.

A concerted effort to control the fiscal deficit and stabilise the government's debt burden would help India's creditworthiness, he said.

"If these efforts fail, local currency rating could be pressured downwards," he warned.

The appointments of reform-mined officials Manmohan Singh as prime minister and P Chidambaram as finance minister have removed some uncertainties over the general direction of policies and point to the continuation of reforms.

India's growth prospects improved mainly due to a booming service sector and recent revival of industrial sector.

"Medium-term economic growth has risen with GDP growth in 2004 likely to remain above 6.0 per cent, lower than last year's monsoon-driven 8.0 per cent," S&P said.

However, the favourable macro-economic conditions including low inflation and a current account balance could be vulnerable to a prolonged period of high oil prices or a loss of investor confidence due to mixed policy signals emanating from the government.

"The uncertainties regarding the new government's policies may have a bigger effect on the fiscal deficit and on the privatisation program than on the country's long-term growth rate," Chew said.

The 2004 budget will be a litmus test of either fiscal consolidation or the continuation of India's parlous fiscal record, S&P said.

Although government has announced its economic policy to emphasise better distribution and efficiency, S&P said the economic consequences and fiscal costs of these proposals are unclear.

Furthermore, the cessation or slowing of privatisation will limit this avenue of government financing. These developments may, therefore, curtail the fiscal consolidation effort, the rating agency said.