Budget to indicate new govt's intent on stepping up reforms, sticking to fiscal discipline: Fitch

Fitch said reduced uncertainty should improve business sentiment and private investment, which may help arrest the deterioration seen in some investment-related economic indicators in recent months, such as cement and steel production.

Fitch said the victory of the BJP in India's general election reduces policy uncertainty in the near term and gives the BJP a mandate to continue its economic reform efforts. Image source: Reuters

The BJP's landslide victory in general election reduces policy uncertainty and the final budget for 2019-20 will indicate whether the new government will step up economic reforms and return to fiscal consolidation path, Fitch Ratings said Friday. The BJP has won more than 300 seats in the latest polls, bettering its performance in 2014, and securing a second term for Prime Minister Narendra Modi.

Fitch said the victory of the Bharatiya Janata Party (BJP) in India's general election reduces policy uncertainty in the near term and gives the BJP a mandate to continue its economic reform efforts. "The final budget for the fiscal year ending in March 2020, expected in July, will give an indication of whether or not the BJP will step up economic reforms and return to fiscal consolidation after moderate fiscal slippages in recent years," it said.

Deviating from the fiscal consolidation path as per the Fiscal Responsibility and Budget Management (FRBM) Act, the government in February's interim Budget pegged the fiscal deficit for 2019-20 at 3.4 per cent of gross domestic product (GDP), as against the original target of 3.1 per cent. In 2018-19, the fiscal deficit was 3.4 per cent of GDP.

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Fitch said reduced uncertainty should improve business sentiment and private investment, which may help arrest the deterioration seen in some investment-related economic indicators in recent months, such as cement and steel production.

The previous BJP-led government implemented a number of ambitious reforms, notably the goods and services tax and the Insolvency and Bankruptcy Code. "We expect the re-elected government to remain reform-minded. The party's campaign manifesto pledged to improve the business environment and governance standards, strengthen infrastructure, and stimulate the manufacturing sector through a new industrial policy," Fitch said.

The global rating agency said the government may also build on other reforms enacted in its first term, which aimed for a larger tax base and improved credit culture, for example, by enhancing the efficiency of the government administration as well as the legal system and judiciary.

"Constraints to the reform agenda include a lack of a majority in the Upper House. Hence, advancing big-ticket reforms such as those relating to land acquisition or labour market flexibility may be challenging," Fitch said.

The agency expects the new government to continue with institutional reforms and a strengthening of the legal and judicial systems.

"Improved business sentiment, together with further reform implementation, should help enhance productivity and support growth, which we see holding up relatively well after some weakening in the second half of 2018," it added.

Fitch had forecast 6.8 per cent growth in the current financial year, followed by 7.1 per cent in 2020-21.

Fitch said the Budget, to be presented in July, should provide meaningful guidance on the medium-term fiscal outlook. Fiscal consolidation has stalled under the BJP in recent years, and its campaign promise to support farmers' incomes has added to spending pressure.

"A weak fiscal position constrains India's sovereign rating. Reducing general government debt to 60 per cent of GDP ceiling by FY25, from a Fitch-estimated 68.8 per cent of GDP in FY19, would require a significant deficit reduction of about 0.5 per cent of GDP annually," Fitch said.

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