Ratings agency Fitch today said the proposed introduction of major tax reforms like the goods and services tax (GST) and the direct tax code (DTC) will help consolidate the poor finances of the states next fiscal.

"Notwithstanding the challenging domestic and global environments, Fitch expects the states' fiscal consolidation to continue in FY13... an improvement in deficit quality, with a faster improvement in the current balance is highly likely," the agency said in a report released today.

States which have been registering faster growth rates and are fiscally better administered will grow faster than the laggards, the report said.

On the much-delayed tax reforms like the DTC and GST, Fitch said the government is unlikely to meet its rescheduled rollout target of April 1, but will come out with the reforms during the course of the fiscal.

However, populist measures in poll-bound states will result in the adoption of loose fiscal policies, the agency warned. Allocations for untargeted subsidies and populist schemes will increase in such states, it said, adding Fitch expects higher food and power subsidies across all states next fiscal especially those having elections.

"A few states may restore fiscal discipline after the elections but the impact of such measures will depend on how lax the fiscal policy was previously," the report said.

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