Slim majority for BJP poses challenges to reforms agenda, say Rating agencies

New Delhi: The BJP losing its outright majority and now having to rely on allies to form a government may delay more far-reaching elements of economic and fiscal reforms like land and labour and impede progress on fiscal consolidation, global rating agencies said on Wednesday.

Fitch Ratings and Moody’s Ratings in separate notes spoke about the implication of Prime Minister Narendra Modi-led BJP losing its majority for the first time since 2014, winning 240 seats in the 543-seat Lok Sabha. BJP now plans to form a government with smaller parties in the National Democratic Alliance, which won another 53 seats, giving the alliance a 293-seat majority.

“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.

Separately, Fitch group entity BMI said the NDA alliance, which is set to form the government, needs to focus on “bread and butter” issues and shift focus away from Hindu nationalism as the electoral mandate reflects that people want the Modi government to refocus efforts to improve people’s life and livelihood.

BMI Head of Asia (Country Risk) Darren Tay said India’s medium-term outlook remains strong and the country will become the third-largest economy by the end of the decade.

“The relatively poor showing of Modi and BJP is because voters are trying to push the Government to refocus efforts on the economy and improve the life and livelihood of the public,” Tay said in a post-election outlook webinar.

He said that the states where BJP tried to push Hindu nationalism voted against the party like Uttar Pradesh where Ram Temple was inaugurated by Modi in January 2024.

The Bharatiya Janata Party (BJP) has won only 33 seats in the northern state of Uttar Pradesh, a steep decline compared to the 63 seats it got in the 2019 general elections.

“The state swung decisively against Modi and BJP and I think the lesson that the government will take away is bread and butter issues ultimately decide votes and they will probably now focus efforts on economy and business development,” Tay said.

Moody’s said it expects policy continuity, especially with regard 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.