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Ratings major S&P will watch Modi govt closely, all eyes on Budget

Investors and business community are banking on Narendra Modi's development track record in Gujarat and expect the new PM to put in place significant reforms

Sourav Majumdar
Published: May 16, 2014 06:30:06 PM IST
Updated: May 16, 2014 06:42:40 PM IST
Ratings major S&P will watch Modi govt closely, all eyes on Budget
Image: Mukesh Gupta / Reuters

The newly elected Narendra Modi government’s reform initiatives to bring the economy back on the growth path will likely have a significant impact on India’s sovereign ratings, ratings major Standard & Poor’s has said. The first real evidence of what the Modi administration proposes to do on the economic front will be seen in the forthcoming Union Budget, in a month or two, the ratings major said.

The India rating (BBB-/Negative/A-3) will be keenly watched by S&P as the new government settles in and begins putting in place its economic agenda. The Modi government, which secured a thumping majority on May 16 in a bitterly contested election, is being watched closely by domestic and global investors and by the business community. They are banking on Narendra Modi’s development track record in Gujarat and expect the new PM to put in place significant reforms.

“In our view, NDA's strong showing indicates that it will have a reasonably good political platform to tackle structural issues,” S&P said in a statement after the results came in.

"What the next government says and does in the coming months is crucial to boosting confidence in the policy settings and the economy," said S&P credit analyst Takahira Ogawa. "If confidence rises, investment and consumption in India could strengthen, after being held back by the uncertainty surrounding the election."

The key challenges for Modi, S&P feels, will be in terms of reviving investor confidence, managing fiscal consolidation, regaining fiscal prudence, improving the current account balance and boosting the financial strength of the Indian banking sector. “…the government will face hurdles in sustaining growth in the medium to long term,” the ratings major said.

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, it adds.

Pointing to some of the steps taken by the United Progressive Alliance government, it said among them were the recently expanded food subsidy system and its incomplete fuel subsidy reforms.

“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.”

Echoing what a number of industrialists have said, S&P pointed out that the challenge for the next government is to regain fiscal prudence in a sustainable way. “Implementation of a goods and services tax could help stabilize 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. It remains to be seen if the new government can keep up that momentum and lift the economy, he said.

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