Positive investor sentiment, which got a boost in the run-up to the Lok Sabha polls, is likely to be sustained following the thumping victory of the National Democratic Alliance, said Moody's Investors Service. Standard & Poor's said the reforms initiative and fiscal policies in the next two-three months will have a significant bearing on the country's credit rating.
"The challenge for the next government is to regain fiscal prudence in a sustainable way. Implementation of goods and services tax could help stabilise government revenues, while potentially improving the country's growth prospects, by promoting inter-state transactions," S&P said in a note. S&P assigned the lowest investment grade rating of 'BBB-' to India, which is under watch for a possible downgrade.
S&P 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." The NDA is set to win elections to the lower house of parliament with a wider margin than expected and may get more than 330 seats in the 543-seat Lok Sabha.
Fitch Ratings said: "A government with a clear mandate reduces uncertainty and increases the chances of decisive policy action to address the economic challenges India faces. We will see whether the new government takes those chances." It said the new government should focus on bringing growth back to higher sustainable levels, which would require a strong pick-up in investments.
The significant parliamentary majority won by the NDA is likely to sustain investor sentiment, which has recently boosted equity indices and the rupee, said Moody's, which also projected a downside risk to 5 per cent GDP growth this year. While policy measures to revive the economy are likely over the coming months, India's growth, fiscal and inflation metrics are unlikely to improve immediately, it said.
"We expect GDP growth to continue to be below potential, at about 5 per cent this year, and the possibility of a sub-par harvest due to El Nino effects poses downside risks," Moody's said. Outlining steps to strengthen the investment climate, Fitch said a clear strategy for fiscal consolidation, enhancing fiscal credibility and creation of a low-inflation environment would be essential to restore confidence.