Expressing fear that country's fiscal deficit might rise, global rating agency Fitch has said that the defeat of Congress in four of the five state assembly elections could lead to higher fiscal deficit target as the Government would be constrained to curb expenditure.
"The setback faced by the Congress Party in state elections could potentially raise political pressure on the government's near-term fiscal goals," the rating agency said.
The United Progressive Alliance (UPA) Government has articulated a strong commitment to fiscal consolidation, Fitch in its report added, "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 global rating agency also noted that "an evident anti-incumbency trend against the Congress could mean an increasing likelihood of political pressure to limit expenditure cut-backs".
Congress was defeated in the recently concluded elections to Madhya Pradesh, Chhattisgarh, Rajasthan and Delhi assemblies. For the current financial year, the Government has set a fiscal deficit target of 4.8 per cent of the GDP.
Finance Minister P Chidamabram at several occasions had asserted that the red line of 4.8 per cent would not be breached.The Government had also announced a slew of austerity measures, including holding a curb on fresh hiring, to contain fiscal deficit at 4.8 per cent.
The government's fiscal deficit has already reached 84 per cent of its stated target in the first seven months of the fiscal year, whereas it was 72 per cent in the same period a year ago. Unless revenues increase significantly in the remaining months of the year, a greater expenditure restraint will be needed to meet the deficit target.
The report further added, "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 rating agency also said the state of public finances form 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.