"Despite impressive progress in recent years, successive governments have failed to address the weakness of public finances, even as they have liberalised the private sector," the report says. "The widening gap between private sector prosperity and public sector impoverishment can only be tackled through large-scale privatisation, as well as fiscal, legal, and regulatory reform."

According to the report, poor education and health, along with profound challenges to India's identity from movements based on caste and religion, will continue to complicate governance in coming years. "The country needs both economic growth and better political management to alleviate its poor public finances and deep social problems," the report says. Structural reforms in the private sector have outpaced those in the public sector, boosting trend GDP growth in recent years and slowly reducing poverty levels. Poor public finances and growing fiscal inflexibility continue to constrain the country's credit rating (local currency, BBB/Stable/A-3; foreign currency, BB/Stable/B).

"India's new government, a 24-party coalition led by the BJP has been more explicit in recognising the severe economic challenges confronting it. Failure to control and reverse the trend of growing fiscal deficits-the combined deficit of the national and state governments could exceed 9 per cent of GDP this year and could further erode the government's ability to meet its spending needs and service its growing debt burden, placing pressure on India's credit rating," the report says. The rating would be consolidated by a credible strategy to reduce the deficit, leading to a primary surplus (the deficit minus interest payments), and to contain surging state government indebtedness, Standard & Poor's says.