Modi’s weaker mandate will slow down reforms, ratings agencies say

The weaker mandate that the Prime Minister Narendra Modi’s alliance won in the general election is likely to apply brakes on policy reforms, Reuters reported, citing a Moody’s Ratings analyst.

Modi’s Bharatiya Janata Party (BJP) fell 32 seats short of the majority mark of 272, making the party that is leading the coalition to depend on allies for support.

The “prospects for even more consolidation do not look as bright as before the polls,” even though that for consolidation will remain intact, the report said, citing Christian de Guzman, the senior vice-president of sovereign risk group at Moody’s Ratings.

Provisional estimates for FY24 issued last week showed higher non-tax revenue and lower revenue spending helped the government contain the fiscal deficit at 5.6% of the gross domestic product (GDP).

Last fiscal, the Reserve Bank of India’s (RBI’s) coffers swelled, while provisions declined, helping it transfer a record $25 billion (₹2.1 trillion) to the government as surplus.

The higher RBI dividend is expected to help the new government fund the fiscal deficit of 5.1% of GDP in the current fiscal and further trip it to 4.5% of GDP in the next fiscal year.

The RBI windfall is also expected to boost government spending to spur growth.

The new government is scheduled to present the budget for the year in July.

S&P Global Ratings on Wednesday, 29 May, revised its outlook on India to “positive” from “stable” on robust economic growth, pronounced improvement in the quality of government spending, and political commitment to fiscal consolidation.

Fitch Ratings on Thursday, 6 June, said that the election outcome should support broad policy continuity, with the government continuing to prioritize infrastructure capex, improvements to the business environment, and gradual fiscal consolidation

“However, coalition politics and a weakened mandate could make it challenging to pass legislation on the more ambitious parts of the government reform agenda,” it said.

“We do not think that the government’s losses at the ballot box will lead to substantial policy adjustments, but the post-election budget in July should provide greater clarity on its economic reform priorities and fiscal plans over the coming five years,” it added.