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Rating agency Fitch today said the setback faced by the Congress Party in state elections could potentially raise political pressure on the government's near-term fiscal goals.
The government has articulated a strong commitment to fiscal consolidation. But this commitment may be tested further as the deficit-reduction goals are stretched, and a steeper political struggle to pull in more votes may hinder the full scope of expenditure restraint, rating agency said.
The state of public finances forms an important driver of India's sovereign ratings.
Rating agency in statement said amidst the monetary authorities' anti-inflation policy bias, appropriate fiscal policies have a greater chance of shoring up the country's savings-investment imbalance. This could lower the current account deficit, and help alleviate another key pressure point for the credit profile.
The central government has stressed its strong commitment to lowering its fiscal deficit to 4.8 per cent of GDP by end of March 2014 (for FY14). Moreover, in the last fiscal year it also demonstrated its ability to take difficult measures to trim expenditure towards the end of the fiscal year, and to meet its headline deficit target. But the state election results might be read as increasing the risk of policy slippage, it said.
An evident anti-incumbency trend against the Congress could mean an increasing likelihood of political pressure to limit expenditure cut-backs.
This would help support economic recovery in the run-up to the national elections which must be held by May 2014. But it may raise some doubt about the government's ability to meet its stated near-term fiscal goals, agency added.
