Global rating agencies Fitch Ratings and Moody's Ratings highlighted on Wednesday the potential delays in economic and fiscal reforms in India due to the Bharatiya Janata Party (BJP) losing its outright majority.
Prime Minister Narendra Modi's BJP secured 240 seats in the 543-seat Lok Sabha, necessitating coalition support from smaller parties within the National Democratic Alliance (NDA), which won an additional 53 seats. This gives the NDA a 293-seat majority.
Fitch Ratings noted that while the BJP-led NDA is likely to form the next government, returning Modi for a third term, the weakened majority could hinder the more ambitious elements of the government’s reform agenda.
"Passing contentious reforms could prove more difficult, particularly around land and labor, which have recently been flagged as priorities by the BJP to boost India's manufacturing competitiveness," Fitch stated.
Moody's Ratings echoed this sentiment, expecting policy continuity in areas such as infrastructure spending and domestic manufacturing. However, the NDA's slim victory margin and BJP's loss of outright majority may delay significant economic and fiscal reforms, potentially impeding fiscal consolidation.
Both agencies foresee a continuation of the government’s current policies despite the reduced majority. Fitch anticipates the government will maintain its focus on capital expenditure, ease of doing business measures, and gradual fiscal consolidation.
It noted that India’s strong medium-term growth outlook remains intact, driven by the government’s capex push and improved corporate and bank balance sheets, though growth prospects might be modest if reforms stall.
Moody's indicated that India's fiscal outcomes will remain weaker compared to Baa-rated peers, despite upcoming fiscal policy indications in the final budget for the fiscal year ending March 2025.
India's real GDP growth accelerated to 8.2% in fiscal 2023-24, up from 7.0% the previous year, propelled by gains in gross fixed capital formation from the government’s infrastructure program, although private consumption remained subdued.
The agency projects real GDP growth of around 7% from fiscal 2023-24 to 2025-26, with potential medium-term growth from infrastructure development and digitalization.
However, it warned that structural weaknesses, such as high youth unemployment and low productivity in agriculture, pose risks to long-term growth potential.
Moody's added that although India is expected to grow faster than other G20 economies through fiscal 2025-26, its fiscal and debt metrics remain weaker than before the pandemic, and below other emerging markets in Asia-Pacific.
The central government’s deficit is likely to have narrowed for three consecutive years, with a target of a 4.5% of GDP deficit by fiscal 2025-26.
"India’s fiscal consolidation post-pandemic has not outperformed other emerging markets in Asia-Pacific, and its fiscal and debt metrics remain weaker than Indonesia, the Philippines, and Thailand, as well as other Baa-rated peers globally," Moody’s concluded.
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