New Delhi

Election results and immediate impact

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A Moody's Ratings analyst predicts that India's ambitious efforts at budget restructuring will be hampered by the alliance led by Prime Minister Narendra Modi's smaller victory margin in the elections. With 240 seats on its own, the Bharatiya Janata Party (BJP), led by Modi, fell 32 seats short of the halfway mark in the 543-member lower house. A total of 293 seats were won by the BJP-led National Democratic Alliance (NDA).

Fiscal discipline concerns

Christian de Guzman, senior vice president of Moody's sovereign risk division, expressed concern about the fiscal prospects following the election results. "It looks like the prospects for even more aggressive consolidation are not as bright as they were before the election results," he stated to Reuters. Nonetheless, Guzman insisted that fiscal restraint will not be abandoned completely. "I still think that the prospects for consolidation will remain intact, and they will retain a level of fiscal discipline," he stated.

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The election resulted in India's benchmark 10-year bond rate rising to its highest level in eight months. India plans to reduce its budget deficit to 4.50 per cent of GDP by the end of 2025/26, down from a predicted 5.1 per cent for the current fiscal year, which ends in March 2025.

Political implications of a smaller mandate

The diminished majority for Modi's alliance enhances the possibility of further populist expenditure to consolidate political support, according to Guzman. The next July budget will reflect the government's fiscal plan, considering the Reserve Bank of India's record surplus transfer of 2.11 trillion rupees ($25.28 billion). This transfer could be used to improve the financial condition or to boost political support. "A shaky political outcome perhaps suggests higher odds for the latter," said Guzman.

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S&P Global Ratings raised India's sovereign rating outlook from 'stable' to 'positive' last week, noting strong economic development that has a positive influence on credit metrics. However, Fitch said on Wednesday that the government's more ambitious measures could be hampered by the weaker majority.

Outlook and rating criteria

Guzman stated that Moody's ratings already consider India's rapid development and good economic prospects, as well as progress in macroeconomic and financial stability. To consider upgrading India's sovereign outlook or rating, Moody's would need a "much more material improvement on the fiscal side," Guzman noted. This would imply a considerable reduction in government debt and increased debt affordability.

In August, Moody's confirmed India's 'Baa3' rating, its lowest investment-grade rating, with a stable outlook. Moody's forecasts 6.6 per cent growth for India in fiscal year 2025, with the general government fiscal deficit, including state deficits, at roughly 6.5 per cent of GDP.

(With inputs from agencies)