Big bang reforms unlikely during Modi Lite 3.0

New Delhi: 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. Moody’s said it expects policy continuity, especially with regards 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 (EoDB) measures, and gradual fiscal consolidation.