By Siddhi Nayak
MUMBAI (Reuters) - The narrower margin of victory for Indian Prime Minister Narendra Modi's alliance in elections will forestall reforms that could have potentially facilitated aggressive fiscal consolidation, an analyst at Moody's Ratings said on Wednesday.
Modi's Bharatiya Janata Party (BJP) won 240 seats on its own, 32 short of the halfway mark in the 543-member decision-making lower house, with the National Democratic Alliance (NDA) which it leads securing a total 293 seats.
"It looks like the prospects for even more aggressive consolidation are not as bright as before they were prior to the election results," Christian de Guzman, senior vice president, sovereign risk group, told Reuters in an interview.
"I still think that the prospects for consolidation will remain intact, and they will retain a level of fiscal discipline."
India's benchmark 10-year bond yield saw its biggest surge in eight months following the poll outcome.
India aims to narrow its fiscal deficit to 4.50% of gross domestic product by the end of 2025/26, from the 5.1% projected in the current year ending in March 2025.
The smaller mandate for Modi raises risks of more populist spending to consolidate political support, Guzman said.
The July budget would account for the government's plans with the Reserve Bank of India's record 2.11 trillion rupees ($25.28 billion) worth surplus transfer.
It could use it to further consolidate the fiscal position or to garner political support, Guzman said. "A shaky political outcome perhaps suggests higher odds for the latter."
S&P Global (NYSE:SPGI) Ratings raised India's sovereign rating outlook to 'positive' from 'stable' last week saying the country's robust economic expansion was having a constructive impact on its credit metrics.
On Wednesday, Fitch said the weakened majority for Modi's alliance could pose challenges for the more ambitious elements of the government's reform agenda.
Guzman said India's high growth and robust economic prospects over the medium-term were already factored into their ratings as was also the progress made on macroeconomic and financial stability.
In order to upgrade India's sovereign outlook or rating, Moody's would need to see a "much more material improvement on the fiscal side," Guzman said.
This requires a material reduction in government debt, an improvement in debt affordability, or what proportion of revenue is accounted for by interest payments or debt servicing, he added.
Moody's in August had affirmed a 'Baa3' rating on India - its lowest investment grade rating - with a stable outlook.
For the fiscal year 2025, Moody's has penciled in growth of 6.6% for India, and the general government fiscal deficit including that of states to be at around 6.5% of GDP.
($1 = 83.4670 Indian rupees)