"The increased probability of accelerated economic reforms was part ofMoody's reasoning in raising the outlook to positive on the country's Ba2ratings last month," Moody's Investors Service said in its latest annualreport on India released in New York on Wednesday. The rating agency saidgreater emphasis is required on the pace of Indian economic reform ratherthan its path.

However, it has expressed concern on India's large trade and current accountdeficits, which have increased its dependence on potentially volatilecapital inflows, might widen further in the near to medium term. "Theenhanced political stability will be crucial to reinforce these efforts andto maintain the reform momentum over the next several years," the leadinginternational rating agency said.

According to Moody's sovereign analysts, additional explanations for renewedoptimism derive from the country's ability to withstand the emerging marketscrises and nuclear sanctions of last year, as well as the improved maturitystructure of its external debt. "Signs that industrial growth is recoveringafter three years of weak performance indicate that corporate restructuringis paying off, especially in the private sector where companies are focusingincreasingly on their core competencies," the Moody's report said.

The report pointed out the troublesome structural challenges that constrainIndia's rating, particularly the heavy public debt and debt service burden,labor market and bureaucratic rigidities, infrastructure shortfalls, andheightened regional tensions with Pakistan. "Budgetary imbalances arepervasive at all levels of the public sector," Moody's said.

The international rating agency feels that although the Indian governmentconsistently aspires to more prudent fiscal policy, the reality nearlyalways disappoints.

"India's macroeconomic policy framework has placed too little emphasis onachieving concrete results despite decades of economic plans. Over themedium term, India's growth rate will need to be higher than the roughly 6per cent average of the 1990s, in fact, even faster than the government'susual 7 per cent target, in order to raise average living standards,"Moody's report said while complementing the Indian government's recentpolicy pronouncements in the direction of addressing the structuralproblems.