With the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) set to form the next government, Moody’s Ratings expects policy continuity with regards to budgetary emphasis on infrastructure spending and boosting domestic manufacturing, to support robust economic growth.

The BJP on its own failed to cross the majority mark of 272 seats, making its alliance NDA partners essential in the formation of the next coalition government.

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, says Moody’s.

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, the rating agency says.

In fiscal 2023-24, India's GDP (gross domestic product) accelerated to 8.2% from 7% the previous year, driven by gains in gross fixed capital formation as the government's infrastructure programme gained further traction even as private consumption remained subdued.

“Our assessment of India's economic strength incorporates real GDP growth of around 7% over the three-year period between fiscal 2023-24 through 2025-26, while factoring potential upside over the medium-term resulting from improvements in productivity and potential growth on the back of traction on infrastructure development and digitalization,” says Moody’s.

“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 cautions.

High levels of youth unemployment across all sectors and weakness in productivity growth in the sovereign's large agriculture sector continue to constrain its growth potential, according to Moody’s.

Gains in manufacturing have not been broad-based, limiting the extent to which the labour force has been able to diversify away from agriculture, which continues to account for 40% of total employment, the rating firm says.

“At the same time, inward foreign direct investment flows have eroded in each of the past three years since reaching a peak in fiscal 2020-21. The erosion in inward foreign direct investment is despite a favorable economic and geopolitical backdrop for India amid broader US-China strategic tensions, suggesting continued constraints from the investment climate,” it says.

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

While Moody’s expects the incoming government to carry over its focus on fiscal consolidation, material improvements in its debt ratios and interest servicing have yet to materialise.

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