Weakened majority for BJP poses challenges to reform agenda, says Fitch

The BJP losing its outright majority and relying on allies to form a government could pose challenges for the more ambitious elements of reform agenda like land and labour, Fitch Ratings said in a note on Wednesday.

Prime Minister Narendra Modi-led BJP lost its majority for the first time since 2014, winning 240 seats in the 543-seat Lok Sabha.

It plans to form a government with smaller parties in his National Democratic Alliance, which won another 52 seats, giving the alliance a 292-seat majority.

"It appears the BJP-led NDA is likely to form the next government, returning Prime Minister Modi for a third term, but with a weakened majority that could pose challenges for the more ambitious elements of the government's reform agenda," Fitch said.

As the BJP fell short of an outright majority and will need to rely more heavily on its coalition partners, "passing contentious reforms could prove more difficult, particularly around land and labour, which have recently been flagged as priorities by the BJP to boost India's manufacturing competitiveness," it said.

Fitch however expected policy continuity to persist despite a slimmer majority.

It expected the government to retain its focus on capex push, ease of doing business measures, and gradual fiscal consolidation.

"We expect India's strong medium-term growth outlook to remain intact, underpinned by the government capex drive and improved corporate and bank balance sheets.

"But upsides to medium-term growth prospects are likely to be more modest if reforms prove more challenging to advance," it added.