Weak BJP could stall reforms but fundamentals strong: Ratings agencies

The slim win for the Prime Minister Narendra Modi-led NDA alliance in the Lok Sabha 2024 polls could slow down reforms essential for fiscal consolidation and lead to higher populist spending, ratings agencies said on Wednesday, but India’s economic fundamentals continues to remain robust.

“Slim NDA win may impede progress on fiscal consolidation,” Moody’s Ratings said in a note. On the other hand, the investment bank Nomura pointed out that despite the NDA’s narrow margin of victory, the economic fundamentals of India would stay strong because “reforms in India have generally survived the test of politics”.

The PM Modi-led National Democratic Alliance (NDA) secured 293 seats to cross the majority mark of 273 in the Lok Sabha 2024 elections at the end of counting on June 4. However Modi’s party, The Bharatiya Janata Party (BJP), which led the alliance, could manage 240 seats on its own.

POLL RESULT COULD HURT REFORMS

According to Moody’s, the fiscal results of the country could now tend to be slower compared to other nations with Baa rating and there are chances that long-term growth is hampered, with deterrents such as a frail productivity rate in agriculture and a high rate of unemployment adding to problems. The benchmark 10-year bond yield saw an eight-month high after the election results were announced.

For Moody’s to upgrade India’s rating from the current Baa3 rating, the country’s fiscal performance would have to reveal more material improvement, the agency said.

Significantly, the country right now is trying to bring down fiscal deficit from its projected rate of 5.1 per cent of GDP at the end of FY25 to 4.5 per cent by FY26-end and, having secured a mandate way below the BJP’s pre-poll “400 paar” promise, there is sufficient risk that the government may prioritise a more populist splurge.

The agency has projected India’s general fiscal deficit at 6.5 per cent of GDP and growth rate at 6.6 per cent for FY25.

The Moody’s observation follows a Fitch report that had observed that the low margin by which the Modi-led NDA won the elections could come in the way of the government’s ambitious reform plans.

ECONOMIC FUNDMENTALS REMAIN ROBUST

Meanwhile, the economic fundamentals of the country continue to be strong, according to the investment bank Nomura.

“Our assessment is that India’s economic fundamentals remain robust. Reforms in India have generally survived the test of politics and we expect the government to continue the pace of governance and administrative reforms, leaving states to work around the more intractable reforms around land and labour,” Nomura said, adding that supply-side reforms are likely to continue.

“We believe the Cabinet could have some new faces and our focus will be on the final budget, most likely in early July, to assess the policy direction,” Nomura said, adding that the new government might focus on reforms related to governance, infrastructure, digitalisation and industrialisation in its first 125 days.