Modi Govt's Reduced Mandate May Hinder India's Fiscal Tightening, Says Moody's

Modi's Bharatiya Janata Party (BJP) clinched 240 seats independently, falling 32 seats short of the halfway mark in the 543-member lower house responsible for decision-making

Last week, S&P Global Ratings upgraded India's sovereign rating outlook to 'positive' from 'stable,' citing the country's strong economic growth and its positive influence on credit indicators

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Prime Minister Narendra Modi's alliance's slimmer margin of victory in the Lok Sabha elections will delay potential reforms that might have paved the way for robust fiscal consolidation, an analyst at Moody's Ratings said on Wednesday.

"It looks like the prospects for even more aggressive consolidation are not as bright as before they were prior to the election results," Christian de Guzman, senior vice president of Sovereign Risk Group, told the news agency Reuters.

Modi's Bharatiya Janata Party (BJP) clinched 240 seats independently, falling 32 seats short of the halfway mark in the 543-member lower house responsible for decision-making. Meanwhile, the National Democratic Alliance (NDA), under the BJP's leadership, secured 293 seats.

"I still think that the prospects for consolidation will remain intact, and they will retain a level of fiscal discipline,” Guzman added.

In line with its fiscal objectives, India aims to reduce its fiscal deficit to 4.50 per cent of gross domestic product by the conclusion of the fiscal year 2025/26, down from the current year's projection of 5.1 per cent, set to end in March 2025.

Guzman highlighted that Modi's diminished electoral mandate poses heightened risks of increased populist expenditures aimed at consolidating political support. The forthcoming July budget will detail the government's strategies, including its intentions regarding the record surplus transfer of Rs 2.11 trillion ($25.28 billion) from the Reserve Bank of India.

Guzman suggested that the surplus could be utilised to strengthen the fiscal stance or garner political backing. "A shaky political outcome perhaps suggests higher odds for the latter," he added. 

Last week, S&P Global Ratings upgraded India's sovereign rating outlook to 'positive' from 'stable,' citing the country's strong economic growth and its positive influence on credit indicators.

Fitch Ratings remarked on Wednesday that the reduced majority for Modi's alliance might present obstacles for the government's more ambitious reform initiatives.

Moody's forecasts India's growth for the fiscal year 2025 to be 6.6 per cent, with the combined fiscal deficit of the central and state governments expected to hover around 6.5 per cent of the Gross Domestic Product (GDP).