Inflation and growth key challenges before Narendra Modi's government: Ind Ra

Written by PTI | Mumbai | Updated: Jul 8 2014, 03:01am hrs
Food inflationApart from inflation, it said a revival in the investment scene is critical to stimulate the GDP growth.(Reuters)
Reviving the economy and pushing growth without fanning inflation are the key challenges before the new government, domestic rating agency India Ratings has said ahead of presentation of the Union budget.

"Reviving the economy and pushing gross domestic product (GDP) growth without stoking inflationary pressure are the main challenges before the new government," it said in a statement today.

Stating that the RBI is doing its part by having a strong anti-inflationary stance in the monetary policy, the rating agency said the government should compliment those with supply side interventions.

"The government will have to formulate a new agricultural policy to address the prevailing stubborn food inflation. This policy must effectively address the changing food consumption patterns of Indian households and accordingly incentivise the crop mix and its production," it said.

Apart from inflation, it said a revival in the investment scene is critical to stimulate the GDP growth.

For a start, the new government can focus on the issues on the tax front, especially resolving retrospective taxation cases (like the over Rs 11,000 crore demand raised on Vodafone) and also establish better coordination between states, it said.

With the industrial production dragging the overall growth down, it said the government must also focus on the manufacturing sector by reducing the "infrastructure deficit".

Growth can be further improved by facilitating greater foreign direct investment, early implementation of the Goods and Services Tax which will streamline the indirect tax collections and also addressing the technological issues confronting the small businesses, it said.

India Ratings recommended continuing on the path of fiscal consolidation adopted by the previous government and specifically said how India lags its peers rated as BBB- by Fitch on the fiscal deficit to GDP ratio.

"India's debt/revenue ratio is much higher than that of other Fitch 'BBB' rated economies due to a smaller revenue base...In FY14, the country's debt/revenue was 3.1x compared with the 'BBB' rated peer group's median value of 1.5x," it said.

The rating agency attributed this to a low revenue base and high committed expenditure and added that the country will have to double its revenue given the high debt levels.

The agency, however, came out against disinvestment and recommended that we should work on augmenting tax revenue through the introduction of the GST and the direct tax code for direct taxation.

For the state-run banks, who it expects would be needing over Rs 6.8 trillion in capital infusion till FY'19 for complying with the stricter Basel-III capital norms, the rating agency suggested the creation of a national asset management company to take over large bad loans.