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MUMBAI, Jan. 8

MOODY'S Investors Service has expressed concern over the inability of the Government to rein in the huge public sector deficit, which, it said in a report on Tuesday, explains the negative outlook on the Government's Ba2 domestic debt rating.

At the same time, the rating outlook on the Ba2 country ceiling for foreign currency debt is stable, reflecting the country's sizeable foreign reserves and manageable external debt service position.

Moody's has clarified that the report is only a yearly update to the markets and should not be confused with a formal rating action that alters the credit rating.

"The current trend of public finances is leading inexorably to a debt trap, and the crowding out of the private sector from the credit markets is growing more acute,'' the report said.

It added that the rising debt service burden was consuming an overwhelming share of the Government's limited financial resources.

In the process, the authorities are left with little fiscal room to redress the infrastructure and social problems, much less to handle business cycle slowdowns.The fiscal dilemma also constrains monetary policy, with the consequent high real interest rates dampening longer-term investment and growth prospects.

``Even with growth at 5-6 per cent, average living standards are stagnating," Moody's analysts said in the report.

"Dependence upon non-resident capital to finance the current account gap is also not sustainable, which again raises concerns about the unfavourable reputation India has earned with foreign investors.''

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