According to Fitch, coalition politics and a weakened mandate of the National Democratic Alliance (NDA) could make it difficult to pass legislation on the more ambitious parts of the government's reform agenda.

The outcome of the Lok Sabha elections is likely to encourage broad policy continuity, with the government continuing to prioritize investment in infrastructure, improving the business environment and gradual fiscal consolidation, Fitch Ratings says.

“The BJP has failed to secure a sole majority in the 543-seat lower house of parliament for the first time since its most recent term in power began in 2014, but we expect it to receive enough support from allied parties in the NDA to form a government in which Narendra Modi remains prime minister,” the rating agency said.

“We do not believe that the government's defeats at the ballot box will lead to significant policy adjustments, but the budget presented after the July elections should provide more clarity on the government's economic reform priorities and its budget plans for the next five years,” it added.

The government has also significantly increased public investment in infrastructure, which has helped India to be one of the fastest-growing major economies in recent years. According to Fitch, real GDP growth reached 8.2% in the fiscal year ending March 2024 (FY24). The rating agency expects growth to remain strong at 7% in FY25.

“We expect India's medium-term economic growth to remain around our trend estimate of 6.2% through FY28, despite the government's narrower majority,” it said.

Sustained public investment to address infrastructure gaps, ongoing digitization efforts and improved balance sheets of banks and companies compared to the pre-pandemic situation should provide a good outlook for private investment, the report said. “We also expect the production-linked incentives program to remain intact, which will help attract foreign direct investment in target sectors such as electronics. However, private investment has not yet accelerated significantly, which poses a risk to the outlook.”

Fitch expects key land and labor law reforms to remain on the agenda of the new government as it seeks to strengthen India's manufacturing sector. However, these reforms have long been controversial and the NDA's weaker mandate will further complicate their passage. This could reduce India's medium-term growth prospects, it said. “However, we believe such reforms will continue to progress at the state level in some parts of the country. There is also potential for judicial reforms to reduce costs and speed up the resolution of court cases,” the rating agency said.

According to Fitch, weaker fiscal metrics compared to other countries represent a significant constraint on India's credit rating.

This came a day after Moody's Ratings said it expected policy continuity in terms of emphasizing infrastructure spending and boosting domestic manufacturing to support robust economic growth. The NDA's relatively narrow victory, as well as the BJP's loss of majority in Parliament, could delay broader economic and fiscal reforms, which could hamper progress on fiscal consolidation, Moody's said.