Ratings agencies fear delay in reforms as BJP loses majority

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With BJP losing its full majority, far-reaching elements of economic and fiscal reforms like land and labour and fiscal consolidation, may get delayed, according to global rating agencies.

In separate notes on the election, Fitch Ratings and Moody’s Ratings laid out the implication of  Narendra Modi-led BJP losing its majority. The party now has to rely on allies to form the government. The smaller parties in the National Democratic Alliance, have won 53 seats, giving the alliance a 293 seats in the 543-member house.

“It appears the BJP-led NDA is likely to form the next government, returning Prime Minister Modi for a third term, but with a weakened majority that could pose challenges for the more ambitious elements of the government’s reform agenda,” Fitch said.

As the BJP fell short of an outright majority and will need to rely more heavily on its coalition partners, “passing contentious reforms could prove more difficult, particularly around land and labour, which have recently been flagged as priorities by the BJP to boost India’s manufacturing competitiveness,” it said.

Moody’s on the other hand said, it expects policy continuity, especially with regards to budgetary emphasis on infrastructure spending and boosting domestic manufacturing, to support robust economic growth.

“However, the NDA’s relatively slim margin of victory, as well as the BJP’s loss of its outright majority in parliament, may delay more far-reaching economic and fiscal reforms that could impede progress on fiscal consolidation,” Moody’s said in a note.

Fitch too expected policy continuity to persist despite a slimmer majority. It expected the government to retain its focus on capex push, ease of doing business measures, and gradual fiscal consolidation.

“We expect India’s strong medium-term growth outlook to remain intact, underpinned by the government capex drive and improved corporate and bank balance sheets. But upsides to medium-term growth prospects are likely to be more modest if reforms prove more challenging to advance,” it added.

India’s fiscal outcomes will remain weaker than Baa-rated peers, even as the final budget for the fiscal year ending March 2025 (fiscal 2024-25) to be released in the next few weeks provides some indications of India’s fiscal policy over the course of the term of the incoming government through 2029, Moody’s said.