Global Economy

Lok Sabha Results: Will a fractured mandate for NDA impede new govt's infra and capex push?

The outcome of the 2024 Lok Sabha elections has delivered a fractured mandate, yet it is not expected to hinder a weaker NDA government from continuing with straightforward reforms in infrastructure and public capex. Economists and ratings agencies, however, warn that potential higher growth might be stunted if the government struggles to implement difficult labour and capital reforms.Pranjul Bhandari, chief economist at HSBC, suggests the government can choose easier reforms like public capex push and support for high-tech and emerging sectors while adhering to fiscal consolidation. However, she notes that challenging reforms such as farm, labour, and land reforms, along with the rationalization of food and fertilizer subsidies, will be more difficult to undertake.

“If the new govt’s focus is on the easy-to-moderate reforms buckets, we believe medium-term annual growth could be on track to reach 6.5%. But if reforms in the moderate-to-hard bucket are done, growth could be 7.5% or more,” said Bhandari.

lack of majority

Tanvee Gupta Jain, an economist with UBS, believes the government will likely follow a medium-term fiscal consolidation roadmap with a populist bias. “The higher-than-expected RBI dividend transfer to govt would create fiscal leeway to increase populist spending to support consumption for lower income strata such as cash transfers, higher rural spending, income tax rationalisation, affordable housing, while continuing its thrust to boost public capex,” she said.

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Jain also thinks the implementation of labour laws could proceed, given that these laws have already been cleared by both houses of Parliament. The government has consolidated 29 central labour laws into four labour codes. “We think the next set of reforms in land and capital that markets were hoping for will likely disappoint as political capital is lower vis-a-vis 2019 and 2014 elections,” she added.

Christian de Guzman, senior VP with rating agency Moody’s, anticipates policy continuity, especially regarding the government’s focus on infrastructure. However, he cautions that the lack of a majority might delay significant economic and fiscal reforms, potentially impeding progress on fiscal consolidation.

Rating agency Fitch concurs, suggesting that passing contentious reforms could be more challenging for the new government.

(With ToI inputs)


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