"The likelihood of a reduction in defence spending is less if you are facing an unstable border situation and an unstable governmental situation in Pakistan. As of now, events in Pakistan do not put in question the positive outlook. However, on a long-term basis it could have a negative effect on the fiscal deficit because of increased defence expenditure," he said. The international rating agency chief stated categorically that the rating and outlook for India will remain unchanged by the Pakistan coup.

"Indian economy is strong enough to withstand these developments and there is no immediate `provocation' for altering the outlook. However, these developments need to be watched carefully as both India and Pakistan are nuclear capable countries," he said.

"Pakistan, which is already in the default grade, may be put under rating-watch to factor in the severity of default," Levy added.

Last week, the US-based rating agency had raised the outlook to positive (from stable) for India's Ba2 ratings on foreign and domestic currency debt. The military coup in Pakistan has not altered this positive outlook for Indian debt, which is currently rated below investment grade.

"The prospect that the government could deliver promised economic reforms was the main factor behind the improved outlook," Moody's said, adding that it would monitor the government's performance over the next 18-24 months.

"The newly-elected government will have to focus on increasing the momentum of fiscal reforms, tackle the issues of subsidy, unemployment, banking and financial sector reforms and the increasing cost of funds for the business sector. It is imperative that the focus shifts from the size of gross fiscal deficit (GFD) to the pattern of GFD and revenue collection, ie. whether the GFD is on account of development of infrastructure or is being ungainfully spent on subsidies," Levy said.

"All major political parties are broadly in consensus on the reforms process. The sectors which are now in immediate need of reforms include the banking sector --particularly the alarming proportion of the non-performing assets-- and the infrastructure sector. The government cannot generate enough revenues for this purpose and their policies should now encourage private sector participation and foreign direct investments into these sectors. However, tariffs, user fees and pricing are important issues to make infrastructure projects commercially viable," Levy said.

He said that India could grow at considerably higher rates than it has done in the past provided fundamental changes are brought into the revenue and expenditure side. "Revenues from disinvestments should be reinvested into the industry and could also be used to retire some high cost debts. The strong capital markets presents a viable alternative source of funds for Indian business," Levy said.