Growing federalism, rising middle-class to help shape economic policies: S&P

Businessline, October 16, 2014
The shift of central policymaking to States and expansion of the middle class are two important trends in India, according to Standard & Poor’s Ratings Services. The scrapping of the Planning Commission is a significant step towards enhancing the autonomy of States, the credit rating agency said in a report published on Thursday.

The agency observed that India’s State Governments are on the verge of gaining much more discretion in the use of transfers from the Centre.

Standard & Poor’s credit analyst Joydeep Mukherji said, “Fiscal decentralisation should result in more competition between States in attracting investment and promoting growth, setting the stage for further economic reform and modernisation.” The Government has reduced the number of centrally-sponsored schemes and given States more flexibility in using the money in those schemes.

S&P said a bulging young lower-middle income group in large and small cities, with strong aspirations for upward mobility, has swelled the middle class in India. Poor GDP growth of recent years has made the middle class more favourable toward economic reforms, which they increasingly see as necessary for rapid economic expansion and their own continued prosperity.

Rising expectations

“The combination of growing federalism and a rising middle class sets the larger political context for the economic policies the government is likely to pursue in the next five years.“We expect the government to seek to improve the administrative performance of the bureaucracy while pursuing gradual fiscal consolidation,” Mukherji said.

Standard & Poor’s had revised the outlook on India’s sovereign credit ratings to ‘stable’ from ‘negative’ late last month.

The outlook reflects the agency’s view that the newly-elected Government will be able to implement economic reforms that spur growth, which in turn improves fiscal performance.

However, the Modi Government is not likely to take dramatic steps to change economic policies, the agency said.

Inflation is likely to remain high at around 8 per cent in 2014 and 7 per cent in 2015, while the general government fiscal deficit is likely to exceed 7 per cent of GDP in fiscal year 2015 (ending March 31, 2015) and remain above 6 per cent in fiscal 2016, the agency said “We believe that India’’ economic performance will disappoint optimists through 2015 but will likely be better than the fears of pessimists over the long term,” Mukherji said.

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