RTTNews - Fitch Ratings projected India's Gross Domestic Product (GDP) at 5% for FY10, and said that the next union government would be facing considerable challenges.

In its report, the agency said that, though the real economic growth averaged 9% for the past five years, it estimated Indian GDP growth was to be 6.5% in FY09.

India's Election Commission will announce the parlialmentary election results on May 16 (Saturday). The caretaker and its predecessor governments were coalition governments and the outcome of results remained uncertain. The new government would have to balance the need for short-term stimulus measures to counter the economic downturn and the necessity for re-establishing a sustainable medium-term path for the country's public finances. The outlook on the foreign currency (IDR) was stable, while that on the local currency IDR was negative.

The agency foresees slowdown in growth due to recession in advanced economies and the sharp reduction in capital inflows to emerging markets. Following the two supplementary budgets in FY09, the tax receipts lowered and there was raise in consolidated government deficit that rose to 10.6% of GDP in FY09 from 6.1% of GDP in FY08.

James McCormack, Head of Asia Sovereigns at Fitch, said that while current economic conditions were prompting many governments to undertake counter-cyclical stimulus measures, the recent deterioration in India's fiscal position accentuated underlying structural weaknesses in public finances that, if un-addressed, could undermine its creditworthiness.

Fitch believes the new government will likely provide additional fiscal stimulus, resulting in a general government deficit of more than 10% of GDP for the second consecutive year, and an increase in the debt/GDP ratio to a record-high 82%.

The FY11 budget would be shaped in part by the recommendations of the 13th Finance Commission to be published at end of October. The agency hopes the Commission would improve the medium-term fiscal outlook; food and fuel subsidies may be better targeted, and infrastructure-spending programmes implemented more effectively.

Fitch expects the 13th FinanceCommission to address the issue of off-budget or below-the-line expenditures, as their inclusion in budgeted spending would enhance fiscal transparency.

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