Despite a nerve-wrecking Win for Modi, Fitch Rating convoys Major Progress

Fitch Ratings anticipates broad policy continuity under Prime Minister Narendra Modi, with a focus on infrastructure, business environment improvements, and gradual fiscal consolidation.

A steep mandate for the Bharatiya Janata Party (BJP) made it appear challenging for the ambitious reforms in India, according to Fitch Ratings. The BJP, despite falling short of a single-party majority with 240 seats in the 543-seat lower house, has secured enough support to form a government. Fitch notes that significant reforms to land and labor laws, crucial for boosting India’s manufacturing sector, may face increased challenges due to the BJP’s narrower mandate. This could limit India’s medium-term growth potential. However, Fitch still projects India’s medium-term growth to hover around 6.2% through FY28, supported by ongoing public infrastructure investments, digitalization efforts, and improved corporate and bank balance sheets.The recent election saw the National Democratic Alliance (NDA) retaining power, albeit with a reduced majority.

The BJP’s coalition politics might impede the passage of significant reforms, though some economic reforms, like the Goods and Services Tax (GST) and the Bankruptcy Code, were successfully implemented in previous terms. The government’s focus on public infrastructure investment has notably contributed to India’s rapid economic growth, with a real GDP growth of 8.2% in FY24. Fitch underscores the importance of continued fiscal consolidation for India’s sovereign rating, which stands at ‘BBB-‘ with a Stable Outlook. Although the government has made strides in meeting deficit targets, achieving further deficit reduction, mainly through durable revenue-raising reforms, will be crucial. Fitch believes that despite election-related spending pressures, the government’s fiscal consolidation targets, including reducing the deficit to 4.5% of GDP by FY26, are attainable. Additionally, some reforms might advance at the state level, and potential judicial reforms could further enhance the business environment.