Lok Sabha Verdict Ensures Policy Continuity But Reform Challenges Remain, Says Fitch
Post-election budget in July should provide greater clarity on economic reform priorities and fiscal plans over the next five years, it said.
Fitch said on Thursday that the National Democratic Alliance maintaining power with a reduced majority should ensure policy continuity in broad terms. However, passing legislation for more ambitious reforms might pose challenges due to coalition politics and the weakened mandate.
The global ratings agency highlighted the government's focus on infrastructure capex, enhancing the business environment, and gradual fiscal consolidation, according to a statement.
"We do not anticipate significant policy adjustments following the government's losses at the ballot box, but the post-election budget in July should offer greater clarity on its economic reform priorities and fiscal plans over the next five years," it said.
Moody's also indicated earlier in the week that it expects policy continuity, especially in terms of emphasising infrastructure spending and boosting domestic manufacturing to support robust economic growth. However, the relatively narrow victory margin of the NDA may delay more extensive economic and fiscal reforms, potentially hindering progress on fiscal consolidation.
Fitch projected a sustained rapid growth rate of 7% in the ongoing fiscal 2024-25. "We anticipate India’s medium-term growth performance to hover around our trend estimate of 6.2% through the fiscal 2028, despite the government’s slimmer majority."
The agency noted that the continued public capex drive, ongoing digitalisation efforts, and improved bank and corporate balance sheets relative to the pre-pandemic situation should support a positive outlook for private investment.
While expecting the Production-Linked Incentive scheme to remain intact, Fitch cautioned that private investment has not accelerated significantly, posing a risk to the outlook.
"We believe major reforms to land and labour laws will remain on the new government’s agenda to enhance India’s manufacturing sector, although these have long been contentious, and the NDA’s weaker mandate will complicate their passage further," Fitch stated, adding that such reforms will continue to progress at the state level in some regions.
India’s weaker fiscal metrics relative to peers constrain its sovereign rating, affirmed at ‘BBB-’ with a 'stable' outlook in January 2024.
Fitch highlighted the importance of the next government addressing high fiscal deficits and reducing debt for future ratings, stating that sustained deficit reduction, particularly supported by durable revenue-raising reforms, would positively impact India’s sovereign rating fundamentals over the medium term.
"We also anticipate the attainment of the 5.1% deficit target for the fiscal 2025," the agency remarked. It acknowledged that while the government's goal of reducing the deficit to 4.5% of GDP in the next fiscal seems increasingly achievable, there are risks of higher spending or capex slippage due to the election.
Moody's had cautioned that although India is projected to grow faster than other G-20 economies through fiscal 2026, structural weaknesses pose risks to long-term potential growth despite near-term economic momentum.
