The next government's medium-term fiscal policy in India will be of particular importance from a rating perspective, Fitch Ratings said on Monday.
Election-connected government spending is supporting growth but may add to fiscal pressures. However, campaign promises to support farmers' incomes including direct cash transfers will add to spending pressures in the current financial year 2010-20, it said.
A modest fiscal slippage relative to the central government's targets in recent years has seen fiscal consolidation stall.
"Reducing general government debt to the 60 per cent of GDP ceiling by the financial year 2024-25 -- from a Fitch-estimated 68.8 per cent of GDP in FY 2018-19, will require significant and politically challenging deficit reduction," said Fitch.
"A weak fiscal position constrains India's sovereign ratings, so the next government's medium-term fiscal policy will be of particular importance from a rating perspective."
General elections running from April 10 and May 19 are causing some temporary uncertainty about India's policy agenda. "Nevertheless, we think there is potential for continued focus on reforms, for example to the legal and judiciary system, following the vote," said Fitch. On April 4, it had kept India's sovereign rating unchanged at the lowest investment grade of BBB- with a stable outlook.
The Reserve Bank of India (RBI) is the first central bank in Asia-Pacific region to begin an explicit easing cycle, cutting policy interest rates by 25 basis points in February and again in April.
Banks have been increasing credit to the private sector in recent months, filling the void left by non-banking financial companies, supported by further capital injections and a looser regulatory stance by the RBI.
"A more growth-friendly monetary policy is one reason we still expect Indian GDP growth to hold up well after softening in the second half of 2017-18. In our most recent Global Economic Outlook in March, we forecast 6.8 per cent growth in FY 2019-20 (ending in March 2020), followed by 7.1 per cent in FY 2020-21,' said Fitch.