More decentralised and middle-class-oriented economic policies could shape India's growth in the next five years, said rating agency Standard & Poor’s.

In a report titled, ‘India – shape of things to come’, Standard & Poor’s has said a shift of Indian central policymaking to the States is one of two important trends in the country; the other being expansion of the middle-class.

According to the report, Prime Minister Narendra Modi's scrapping of the Planning Commission is a significant step in enhancing the autonomy of the States. The State Governments are on the verge of gaining much more discretion in the use of transfers from the Centre, it said.

"Fiscal decentralisation should result in more competition between States in attracting investment and promoting growth, setting the stage for further economic reform and modernisation," said Standard & Poor's credit analyst Joydeep Mukherji.

“The Government has reduced the number of Centrally-sponsored schemes and given States more flexibility in using money in those schemes. Moreover, scrapping the Planning Commission also allows States to receive more federal transfers without strings attached, giving them the scope to determine their own spending priorities," the report added.

A bulging, young lower-middle income group in large and small cities, with strong aspirations for upward mobility, has swelled the middle-class in India, the report pointed out. The poor GDP growth of recent years has made the middle-class more favourable towards economic reforms, which they increasingly see as necessary for rapid economic expansion and their own continued prosperity.

"The combination of growing federalism and a rising middle-class sets the larger political context for the economic policies the Government is likely to pursue in the next five years. We expect the Government to seek to improve the administrative performance of the bureaucracy while pursuing gradual fiscal consolidation," Mukherji said.

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