NDA’s slim victory could delay far-reaching reforms: Moody’s

Rating agency Moody's on Wednesday said the victory of the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) in the recently concluded Indian general election would result in policy continuity. 

But the ‘slim’ margin of victory, and loss of outright majority in Parliament, it said, could delay more far-reaching economic and fiscal reforms, which could impede progress on fiscal consolidation.

“We expect policy continuity, especially… budgetary emphasis on infrastructure spending and boosting domestic manufacturing, to support robust economic growth,” the rating agency said.

At the recently concluded general election, the results for which were announced on 4 June, the Bharatiya Janata Party-led National Democratic Alliance’s tally stood at 293 seats, while the Opposition INDIA bloc secured 233 seats in the lower house of Parliament. As many as 272 of the 543 Lok Sabha seats are required to stake claim to form the government.

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The NDA had won 353 seats in the 2019 election, while the main Opposition, the Congress party-led United Progressive Alliance, had secured a mere 91 seats. 

Weaker than peers

“India’s fiscal outcomes will remain weaker than Baa-rated peers, even as the final budget for the fiscal year ending March 2025 (fiscal 2024-25) to be released in the next few weeks provides some indications of India’s fiscal policy over the course of the term of the incoming government through 2029,” Moody’s said.

“Although we project India to grow faster than all other economies in the G20 through fiscal 2025-26, near-term economic momentum masks structural weaknesses that pose risks to long-term potential growth,” it added.

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Interestingly, Moody’s rates India’s sovereign credit ratings at Baa3, which indicates the lowest possible investment grade, similar to S&P and Fitch, which rate India at BBB-.

A sovereign credit rating measures a government’s ability to repay its debt. A higher rating indicates greater trust in the government’s ability to repay, and consequently, lower borrowing costs. 

Constrained investment climate

India has maintained that its economic health has improved considerably since the pandemic, and finance ministry officials have met rating agency officials to press for an upgrade.

But according to Moody’s, high youth unemployment in India, weakness in the agricultural sector, hindering of agricultural modernisation, narrow manufacturing base, and erosion of foreign direct investment, suggest continued constraints from the investment climate.

“Additional structural reforms and greater traction on current initiatives—such as a calibrated liberalization of cross-border trade, a reconsideration of labour reforms and an accelerated implementation of the Production-Linked Incentive Schemes to promote manufacturing—would help address these challenges,” Moody’s said.

Rating agencies use various parameters to rate a sovereign, including growth rate, inflation, government debt, short-term external debt as a percentage of GDP, and political stability.

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“While we expect the incoming government to carry over its focus on fiscal consolidation, material improvements in its debt ratios and interest servicing have yet to materialise,” Moody's said. 

“Since reaching a trough in fiscal 2020-21, the central government’s deficit is likely to have narrowed for three consecutive years; if the planned deficit of around 5% of GDP announced in the interim budget for fiscal 2024-25 is achieved, it would place the government’s goal of achieving a 4.5% of GDP deficit by fiscal 2025-26 within reach,” the rating agency added.

“However, the pace of India's fiscal consolidation post-pandemic has not outperformed other emerging markets in Asia-Pacific, and its fiscal and debt metrics remain weaker than Indonesia, the Philippines and Thailand, as well as other Baa-rated peers globally.”