India's watershed election has laid the foundation for economic reforms – but now the real test begins.
On Thursday, the new government led by Narendra Modi will present its first budget, faced with the challenge of balancing its pro-growth agenda with the need for fiscal consolidation.
"The backdrop of weak growth makes it pertinent for the new government to come up with a holistic road map to improve the growth outlook. We believe the government needs to cut back on less effective redistributive polices and implement reforms that will boost productive investment and job growth," Morgan Stanley economists led by Chetan Ahya wrote in recent report.
Asia's third-largest economy is stuck in a rut with weaker consumption and stalled investments hindering growth. The economy expanded 4.7 percent in the fiscal year that ended March 31, with growth stuck below 5 percent for a second consecutive year.
It also faces persistently high fiscal deficits in part due to a large population and low per capita income levels, which limits the government's tax revenue base while increasing pressure to boost spending on subsidies.
Since coming into to power in late-May, Modi has lived up to his reputation as an effective administrator – recently hiking railway fares to improve the financial health of the state-run national rail operator, for example.
As a result, expectations that the government will deliver critical reform initiatives are high.
"We remain optimistic on the direction for fiscal consolidation. Tough decisions are likely to be made to prune unproductive and populist expenditure over the next few years. This will mark an important shift away from entitlement based consumption growth towards more private sector-led investment growth," Radhika Rao, economist at DBS Group Research.
Reforms to watch out for
While investors have a long wish list for the budget, there are four reforms that would demonstrate the government's commitment to improving the country's long-term economic outlook, according to economists.