The economy is likely to grow by 7.5 per cent in 2012-13 and public finances of various state governments are likely to see consolidation during the next fiscal, ratings agency Fitch said here on Thursday.

“Fitch expects Indian economic growth to rebound to 7.5 per cent in FY—13 from 7 per cent in FY12 ... the Indian economy is expected to perform better than the developed economies,” Fitch Ratings said in its ‘2012 Outlook: Indian Subnationals’

According to Fitch, after a period of pause in reforms the government has again taken up initiatives on special economic zones and increasing foreign participation in the government and corporate debt market and these are likely to have a positive impact.

The agency had earlier revised down its growth projection for the Indian economy in 2011-12 to 7 per cent, from 7.5 per cent earlier, on account of sustained inflation, the global slowdown and high domestic interest rates.

The Indian economy had expanded by 8.5 per cent in 2010-11.

It said that though growth will rebound in 2012-13, the economic performance in the states will vary.

“States with better infrastructure and growth-oriented policies are likely to grow faster and will improve their fiscal performance. The smaller states, especially the special category states, will depend on the federal government for revenue and their performance will mirror the federal government’s,” it said.

It said that “the reform-oriented economic growth” in the next financial year will help states to achieve faster fiscal consolidation.

“The expected improvement in economic growth will result in further fiscal consolidation,” the report said.

According to Fitch, the gross fiscal deficit of the state governments is likely to be 2.2 per cent in 2011-12 as against 2.6 per cent in the last year.

“An improvement in deficit quality, with a faster improvement in the current balance is highly likely. However, due to specific structural issues for each state, the extent of improvement will vary.

“Faster growing and better fiscally administered states will lower their deficits more quickly than the laggard states,” it said.

The agency, however, said that the two key reform bills in taxation — the Direct Tax Code (DTC) and the Goods and Services Tax (GST) — are likely to miss their rescheduled date of implementation of April 1, 2012.

“Fitch expects that all issues will be sorted out in FY-13. The implementation of the DTC and GST would be credit positive for India and its subnationals,” it said.

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