Defeat of Congress may lead to higher fiscal deficit: Fitch

For the current fiscal, the government has set fiscal deficit target of 4.8 percent of the GDP.

PTI| Updated: Dec 10, 2013, 20:57 PM IST

New Delhi: The poor performance of Congress in the just-concluded Assembly elections in four states could push up the Centre's fiscal deficit as there is an "increased likelihood of political pressure to limit expenditure cut-backs", global rating agency Fitch said in a report Tuesday.

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

The United Progressive Alliance (UPA) government has articulated a strong commitment to fiscal consolidation, it said, adding, "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".

"An evident anti-incumbency trend against the Congress could mean an increasing likelihood of political pressure to limit expenditure cut-backs," it said.

Congress was defeated in the just-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 percent of the GDP.

Finance Minister P Chidamabram at several occasions had asserted that the red line of 4.8 percent 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 percent.

The government's fiscal deficit has already reached 84 percent of its stated target in the first seven months of the fiscal year, whereas it was 72 percent 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.

Fitch said: "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.

This could lower the current account deficit and help alleviate another key pressure point for the credit profile, Fitch said.