The reforms initiative of the new government and its fiscal policies in the next 2-3 months will have a significant bearing on the countries credit rating, rating agency Standard & Poor's said today.
"The challenge for the next government is to regain fiscal prudence in a sustainable way. Implementation of a goods and services tax could help stabilise government revenues, while potentially improving the country's growth prospects, by promoting inter-state transactions and general efficiency of the economy," it said in a note.
S&P has assigned lowest investment grade 'BBB-' rating to India, and has kept it under watch for a possible downgrade.
The BJP-led NDA is winning the lower house of parliament with a wider margin than expected. The alliance is expected to get more than 330 seats in the Lok Sabha which has 543 seats.
"In our view, NDA's strong showing indicates that it will have a reasonably good political platform to tackle structural issues," it said.
S&P credit analyst Takahira Ogawa said: "What the next government says and does in the coming months is crucial to boosting confidence in the policy settings and the economy. If confidence rises, investment and consumption in India could strengthen, after being held back by the uncertainty surrounding the election."
However, the government will face hurdles in sustaining growth in the medium to long term, S&P said.
The hurdles include reviving investor confidence, managing fiscal consolidation, regaining fiscal prudence, improving the current account balance and boosting the banking sector's financial strength, it added.
The outgoing UPA government recently expanded the food subsidy system and its fuel subsidy reforms are incomplete.
"If the next government fails to lift confidence, its task of turning the economy around will get heavier," Ogawa said.
The general sentiment in the economy has been improving in the run-up to the election. It remains to be seen if the new government can keep up that momentum and lift the economy. The first possible glimpse of that would be the announcement of a revised budget, which we expect in a month or two, it said.