The clear electoral mandate given to the Narendra Modi-led BJP has reduced political uncertainty and improved the prospects for economic policy reform, Fitch Ratings said today.
"This gives the new government a level of stability to enact its policy agenda that did not exist under the previous coalition administration," said the global credit rating firm.
"The strength of the BJP's mandate will be reinforced by the particularly weak outcome for the incumbent Congress party, which fell to 44 seats from 206 - its worst result ever," it said.
However, Fitch added: "The government's first budget, likely to be released in July, will be a key indicator of Modi's priorities and legislative agenda."
India is facing a number of economic challenges - including a significant deceleration of growth, a wide fiscal deficit and persistently high inflation, it added.
The country ranks low relative to its 'BBB' range peers on the World Bank's Governance Indicator (48th percentile versus a 'BBB' median of 55) and Ease of Doing Business Indicator (28th percentile versus a 'BBB' median of 71).
The most salient of these issues from a sovereign credit perspective is the need to re-boost the sustainable growth rate, the global credit rating agency said.
"This will require a re-acceleration of the investment cycle, which has been hindered in particular by stalled infrastructure projects," it added.
Clearing the bottlenecks for infrastructure projects is likely to be an early priority, it said.
Fitch further said that sustaining the investment cycle over the long run will require a broader improvement in the business environment.
"Structural reforms related to governance, and the reduction of red tape, are essential to re-accelerating economic activity," it said.
It observed that the government will be constrained from spurring growth through fiscal stimulus, owing to the wide fiscal deficit and high debt load.
In particular, the establishment of a policy framework to achieve the goals of the Fiscal Responsibility and Budget Management Act, which calls for keeping deficit at 3 per cent of GDP by 2016-17, would be credit positive.
Establishing a low-inflation environment will also be supportive of macroeconomic stability and growth.
Government policies to reduce food price growth will also be key for reducing the structural drivers of inflation, it said.