Fitch Ratings on Thursday warned that coalition politics and a weakened mandate could hinder the passage of ambitious reforms.
“We believe major reforms to land and labour laws will remain on the new government’s agenda as it seeks to boost India’s manufacturing sector. However, these reforms have long been contentious, and the NDA’s weaker mandate will complicate their passage further. This could reduce the potential upside to India’s medium-term growth prospects,” Fitch stated.
The BJP fell short of a single-party majority in the 543-seat lower house of parliament. Despite this setback, Fitch expects the BJP to secure enough support from allied parties within the NDA to form a government.
Fitch anticipates broad policy continuity, with the government likely to prioritise infrastructure capital expenditure, business environment improvements 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,” Fitch noted.
“We do not expect the government’s losses at the ballot box to 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,” Fitch stated.
During its first two terms, the NDA had a mixed record on implementing economic reforms. However, some significant measures, such as the Goods and Services Tax (GST) law and the Bankruptcy Code in 2016, were passed. The government also significantly increased public infrastructure investment, helping to position India among the fastest-growing major economies in recent years.
Fitch expects growth to remain rapid at 7 per cent in the current fiscal year. “We anticipate India’s medium-term growth performance to remain around our trend estimate of 6.2 per cent through 2027-28, despite the government’s slimmer majority”.
Fitch believes land and labour law reforms will continue to progress at the state level in some parts of the country. There is also potential for judicial reforms aimed at lowering costs.
