Modi’s smaller mandate likely to slow India’s fiscal tightening: Moody’s

The Bharatiya Janata Party (BJP) won 240 seats in the recent elections, 32 seats short of the majority needed in the 543-member lower house. This narrower margin of victory for Prime Minister Narendra Modi’s alliance may slow down the necessary fiscal reforms for aggressive budgetary consolidation, according to an analyst from Moody’s Ratings.

Christian de Guzman, a senior vice president in the sovereign risk group at Moody’s, stated that while the prospects for fiscal consolidation remain, they are not as strong as before the election results. Modi’s BJP, along with its allies in the National Democratic Alliance (NDA), secured a total of 293 seats.

Following the election results, India’s 10-year bond yield saw its largest surge in eight months. India aims to reduce its fiscal deficit to 4.50% of GDP by the end of 2025/26, from the current year’s projection of 5.1%. However, the smaller mandate for Modi increases the risk of more populist spending to consolidate political support, said Guzman.

The upcoming July budget will reflect the government’s plans, including the use of the Reserve Bank of India’s record 2.11 trillion rupees ($25.28 billion) surplus transfer. This could either help consolidate the fiscal position or be used for political support, with a shaky political outcome suggesting higher odds for the latter.

Last week, S&P Global Ratings raised India’s sovereign rating outlook to ‘positive’ from ‘stable,’ citing robust economic growth. However, Fitch warned that the weakened majority for Modi’s alliance could pose challenges for more ambitious government reforms.

Guzman emphasized that India’s high growth and robust economic prospects over the medium term are already factored into their ratings. For an upgrade in India’s sovereign outlook or rating, Moody’s would need to see significant improvements on the fiscal side, such as a substantial reduction in government debt and better debt affordability.

Moody’s affirmed a ‘Baa3’ rating on India in August, its lowest investment-grade rating, with a stable outlook. For the fiscal year 2025, Moody’s projects a growth rate of 6.6% for India, with the general government fiscal deficit, including states, around 6.5% of GDP.

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