Polls continue to test India's fiscal commitment: Fitch

The setback faced by the Congress Party in state elections could potentially raise political pressure on the government's near-term fiscal goals, says Fitch Ratings.

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.

The state of public finances forms an important driver of India's sovereign ratings. 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 (CAD), 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 the end of the fiscal year (ending in March 2014). 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. 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.

The government's fiscal deficit has already reached 84 per cent of its stated target in the first seven months of the fiscal year, versus 72 per cent over the same period a year ago. This implies a weaker headline - and operating - fiscal position. Unless revenues surprise significantly on the upside in the remaining months of the fiscal year, it also implies the need for greater expenditure restraint than last year, to meet the deficit target.

At the same time, significant fiscal policy slippage is not a certainty. There is not much time before general elections for a shift in policies to gain more traction with voters. We will assess the campaign pledges, and the implications for the post-election fiscal outlook. A more definitive medium-term fiscal framework will only emerge once the next government is formed.

(The statement was released by the rating agency)