June 5th 2024.
On Wednesday, global rating agencies Fitch Ratings and Moody's Ratings expressed concerns about the implications of the BJP losing its outright majority in the recent Lok Sabha election in India. The BJP, led by Prime Minister Narendra Modi, had been in power since 2014 but this is the first time they have had to rely on allies to form a government. This may have a negative impact on the progress of economic and fiscal reforms, such as those related to land and labor, as well as on efforts towards fiscal consolidation.
Fitch noted that while the BJP-led National Democratic Alliance (NDA) is likely to form the next government, their weakened majority may pose challenges for the more ambitious elements of their reform agenda. This is because passing contentious reforms, especially in areas like land and labor, may prove to be more difficult with a coalition government. Additionally, Fitch's group entity BMI pointed out that the NDA will need to focus on more practical issues, such as improving people's lives and livelihoods, rather than solely on Hindu nationalism.
Despite these challenges, India's medium-term outlook remains strong and the country is expected to become the third-largest economy by the end of the decade. However, the recent election results show that voters are pushing the government to prioritize economic development and improvement of their daily lives over Hindu nationalism. In states where the BJP had focused on Hindu nationalism, such as Uttar Pradesh, their support saw a decline.
Moody's also highlighted the need for policy continuity, particularly in areas like infrastructure spending and boosting domestic manufacturing, to support strong economic growth. However, the NDA's slim margin of victory and the BJP's loss of its outright majority in parliament may delay more far-reaching economic and fiscal reforms, which could impede progress towards fiscal consolidation.
Despite these challenges, both Fitch and Moody's expect policy continuity to persist and for the government to maintain its focus on infrastructure development and gradual fiscal consolidation. India's strong medium-term growth prospects are still intact, but may not see the same level of upside if reforms prove to be more difficult to implement.
In terms of fiscal policy, Moody's expects India's fiscal outcomes to be weaker than other Baa-rated peers, even as the final budget for fiscal year 2024-25 is yet to be released. In the past year, India's real GDP growth has accelerated, driven by the government's infrastructure program, but there are still structural weaknesses that could impact long-term potential growth, such as high levels of youth unemployment and low productivity in the agriculture sector.
While the government has been working towards fiscal consolidation, improvements in debt ratios and interest servicing have yet to materialize. India's fiscal metrics are weaker than other emerging markets in the Asia-Pacific region, and remain worse than before the pandemic when India's rating was higher. However, if the government is able to achieve its planned deficit target of 5% of GDP by fiscal year 2024-25, it may be on track to reach their goal of a 4.5% deficit by fiscal year 2025-26.
Overall, while there may be some challenges ahead for the NDA government in terms of passing reforms and achieving fiscal consolidation, India's strong medium-term growth prospects remain intact. The outcome of the recent election reflects a desire for the government to focus on practical issues and economic development, rather than solely on Hindu nationalism.
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