Chennai: Spelling tough challenges ahead for the new government that will form once the Lok Sabha polls are done with, a report said lawmakers will have to face issues such as high public debt, weak financial sector and lagging structural reforms.

Released by Fitch Ratings, the report has taken into account failing incomes, rising unemployment among others to deny country a sovereign rating upgrade for the 13th time in a row.

It must be noted that top political parties are promising various schemes that would put more stress on the budget, leaving important sectors like healthcare, underserved.

The ratings organisation has kept India’s rating unchanged at the lowest investment grade of BBB-, with a stable outlook. It was in August 2006 that Fitch had last upgraded India’s sovereign rating from “BB+” to “BBB-” with a stable outlook.

“India’s ratings balance a strong medium-term growth outlook and relative external resilience stemming from strong foreign reserve buffers, against high public debt, a weak financial sector and some lagging structural factors,” Fitch said.

GDP

According to the report, Fitch Ratings has kept the estimated real GDP growth for FY19 low at 6.9 per cent, compared with 7.1 per cent a year ago.

The deceleration in recent quarters has been mainly driven by domestic factors such as weak manufacturing performance and low food inflation which is pushing down farmer’s incomes, said Fitch Ratings.

“Polls indicate that the next government will likely have a smaller majority in the lower house of parliament, the Lok Sabha, than the current government and it might find it more difficult for major reforms such as GST,” the report said.

Policies will matter

According to the report, the next government’s medium term fiscal policy will be of particular importance. The ongoing campaigns by the political parties involve promises of greater income support with direct cash transfers and farm loan waivers, which would require a higher spending by the government.

However, even though the government deficit is stable at seven per cent, the off-budget financing has increased, it added.

This has resulted in an increase in total government debt as a percentage of the GDP from 67 per cent in 2014 to 68.8 per cent, the report said.

Any incoming government would have to reduce this number to 60 per cent of the GDP by March 2025, according to the Fiscal Responsibility and Budgetary Management Act 2018, added the report.

NPA problems

Taking weak credit into account, the report said although the overall credit growth is picking up with improving condition of NPAs, the banking sector earnings remain weak, particularly of PSU banks as the speed of resolution remains slow. Further, the stress in NBFCs sector has also reduced the credit offtake, it said.

The report also mentioned issues that would be created by rising unemployment in the country, and the underlying structural weaknesses with a weak governance and low human development.