Standard & Poor's Ratings Services expects the new India government's reform initiatives in economic and fiscal policies in the next two to three months may have significant implications on the sovereign credit rating on India (BBB-/Negative/A-3).
In S&P’s view, NDA's strong showing indicates that it will have a reasonably good political platform to tackle structural issues.
Standard & Poor's credit analyst Takahira Ogawa said "What the next government says and does in the coming months is crucial to boosting confidence in the policy settings and the economy.
"If confidence rises, investment and consumption in India could strengthen, after being held back by the uncertainty surrounding the election."
However, the government will face hurdles in sustaining growth in the medium to long term. According to the global rating agency, the hurdles include reviving investor confidence, managing fiscal consolidation, regaining fiscal prudence, improving the current account balance, and boosting the banking sector's financial strength.
Investments, particularly in infrastructure and the mineral resources sector, face slow approval processes at central and state government levels. This has reduced economic growth potential.
The rating agency noted that the outgoing United Progressive Alliance government recently expanded the food subsidy system and its fuel subsidy reforms are incomplete.
In the past two budget years, the government increased non-tax revenues by accelerating divestments of shares in government-owned companies, increasing dividend receipts from government-owned companies, and delaying payments, such as fuel subsidies.
In S&P’s view, the challenge for the next government is to regain fiscal prudence in a sustainable way. Implementation of a goods and services tax could help stabilise government revenues, while potentially improving the country's growth prospects, by promoting inter-state transactions, and general efficiency of the economy.
"If the next government fails to lift confidence, its task of turning the economy around will get heavier," Mr. Ogawa said.
The general sentiment in the economy has been improving in the run-up to the election. S&P said it remains to be seen if the new government can keep up that momentum and lift the economy. The first possible glimpse of that would be the announcement of a revised budget, which we expect in a month or two.