According to a report on India's economy published in Standard & Poor's CreditWeek, 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 said.

Structural reforms in the private sector have out paced those in the public sector, boosting trend GDP growth in recent years and slowly reducing poverty levels, the US-based agency said. Examining the new coalition government's struggle to stimulate private sector growth while reforming its large, inefficient public sector, it said, ``despite impressive progress in recent years, successive governments havefailed to address the weakness of public finances, even as they have liberalized 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."

``India's new government, a 24-party coalition led by the BJP has been more explicit in recognizing the severe economic challenges confronting it. Failure to control and reverse the trend of growing fiscal deficits - the combined deficit of the Central and state governments could exceed 9% of GDP this year-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.

"Animprovement in India's sovereign credit worthiness depends on fiscal progress, along with timely implementation of `second generation' reforms, succeeding the first round seen in the early 1990s, to restructure the financial sector, resume external liberalization, remove the visible and invisible barriers to investment, and withdraw the government from the costly heights of the economy," the report says.

Despite the increasingly polygamous nature of India's political parties, the country is likely to enjoy more stability in coming years (after enduring six different governments in the past three years) for two main reasons: public hostility toward further elections; and the enhanced strength of two southern regional parties, whose alliance with the BJP is based on a common opposition to the Congress party in both National and state politics, Standard & Poor's says.

"Unlike its predecessor, the new coalition is less dependent on the whims of the smaller partners, and its larger partners are generally infavor of deeper economic reforms. A longer life expectancy should encourage the government to undertake difficult reforms.

Prospects for an improvement in India's economic performance and credit standing depend on whether stability can lead to a new political consensus in favor of more significant structural reforms in the PSUs," the report says.