"India's budget pursues realistic fiscal consolidation, a credit positive for the sovereign", said Moody's in its credit outlook for the country.
Chidambaram in his Budget for 2013-14 proposed to bring down the fiscal deficit to 4.8 per cent of the Gross Domestic Product (GDP) from 5.2 percent in the revised estimates for the current financial year.
"This plan of modest fiscal consolidation is credit positive for the sovereign because, against a backdrop of subdued GDP growth and upcoming elections, it is a realistic effort to correct India's macroeconomic imbalances", the rating agency said.
Earlier, ratings agencies like Standard and Poor's and Fitch had threated to downgrade India's sovereign credit rating to junk grade in view of the worsening fiscal position of the government. They also are likely to come out with fresh assessment in the backdrop of the Budget proposals.
Moody's had assigned BAA3 rating to India, which indicates investment grade rating with stable outlook.
The report further said that fiscal consolidation proposed by Chidambaram could could pave the way for monetary easing, which would revive growth.
The extent of easing, however, would depend upon the assessment of the RBI on the commitment of the government to contain fiscal deficit in the Budget.
The RBI had been insisting on a sustained commitment to fiscal consolidation to help it ease monetary policy.
Moody's said India's fiscal 2013 outcome demonstrates the sovereign's commitment to the Budget target.
Efforts to rein in deficits are a step in the right direction because large fiscal deficits constrain credit by fuelling inflation, crowding out private-sector access to domestic savings and widening the current account deficit.
On growth, it said, assumptions may be "optimistic".
"The Indian government will need a similar commitment and implementation capacity to meet its fiscal 2014 deficit target of 4.8 percent of GDP, but we consider many of its assumptions optimistic," the Moody's report said.
The Budget assumes nominal GDP growth (after taking into account inflation) of 13.4 percent and total revenue growth of 23.4 percent, including a doubling of revenue from divestments.
The Budget also anticipates total expenditure growth of 16.4 percent, with 29 percent growth in planned spending and a 10 percent reduction in subsidy spending.
Moody's said achieving such targets will be "challenging".
In particular, it said, India's divestment revenues have generally been lower than what the government has budgeted.
"Furthermore, there are still no indications that GDP growth (and hence tax revenues) will accelerate to the extent the government expects. Finally, the subsidy bill is likely to overshoot Budget estimates, as it has done the past seven years," the rating agency added.
The agency said if the government is able to meaningfully reduce the deficit, it will negatively affect growth similar to how GDP growth decelerated to 4.5 percent in October-December quarter 2012-13 from 5.3 percent the previous quarter.
Moody's further said a more aggressive fiscal consolidation would have been unrealistic.
"Although a lower deficit target for fiscal 2014 would have suggested a more aggressive fiscal consolidation effort, it also would have been less realistic," it said.
As per the agency, an aggressive fiscal consolidation effort would have been difficult to achieve given that low income significantly constrains the
government's revenue base and necessitates social expenditure.
It said just 3 percent of the Indian population falls under the personal income tax net, whereas almost 30 percent of the population falls below the poverty line.
"What is more likely is a continued chipping away at expenses, such as what has happened with fuel subsidies over the past two-and-a-half years, and expanding the revenue base, which is currently taking place with the service sector tax net," Moody's added.