Rating agencies such as Fitch and Moody’s on Wednesday said passing major and contentious reforms such as land and labour could prove more difficult for the next Bharatiya Janata Party (BJP)-led coalition government though broad policy continuity may persist.
Jeremy Zook, director and primary sovereign analyst for India, Fitch Ratings, in a note, said that a weakened majority could pose challenges for the more ambitious elements of the government’s reform agenda, even as the strong medium-term growth outlook remains intact, underpinned by the government capex drive and improved corporate and bank balance sheets.
Echoing similar views, Christian de Guzman, senior vice president, Moody’s Ratings, says that policy continuity is expected, 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. India’s fiscal outcomes will remain weaker than Baa-rated peers, even as the final budget for the financial year ending March 2025 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,” said Guzman in a note.
Moody’s Ratings further said that near-term economic momentum masks structural weaknesses that pose risks to long-term potential growth with high levels of youth unemployment across all sectors and weakness in productivity growth in the sovereign’s large agriculture sector continuing to constrain its growth potential.
Meanwhile, Pranjul Bhandari, chief India economist, HSBC, expects ‘easy’ reforms like capex thrust on infrastructure, improving food supply management, maintaining inflation at 4 per cent, and providing easy credit to small firms to continue, which generates the base case of 6.5 per cent growth potential. “Interestingly, most of these reforms were via executive action, so a slower legislative process may not impact them immediately,” she adds.
However, reforms that require legislative action like improving the Goods and Services Tax (GST) structure, land, labour, farm, judiciary, and bureaucratic reforms may prove hard to undertake.
Samiran Chakraborty, chief economist at CitiGroup, says that there is brisk fiscal space available to the government, which can be used for some new spending focused on the poor, women, and rural areas, but capex focus is likely to remain.
“The broad agenda of infrastructure, manufacturing, and technology to take India’s economy forward, most likely would not take a backseat. However, the contentious structural reforms might be delayed till some of the political headwinds for NDA recede. Welfare spending could rise, but that can coexist with gradual fiscal consolidation as tax growth is strong. Moreover, the economy appears in good shape in terms of growth and stability,” added Chakraborty.
First Published: Jun 05 2024 | 6:08 PM IST
