Moody's Analytics said that the reduced political stability and the need for consensus building that is inherent with a coalition government may erode investor confidence in the near term.
Coalition government might be a good thing for India but it could slow decision making and potentially dilute some key policy initiatives of the Bharatiya Janata Party, Moody's Analytics said in its India's election review on Friday.
It said that the upcoming Union Budget, due in the September quarter, could be an early indicator of policy priorities.
'The BJP's greatly weakened position marks a significant shift in the political landscape. Just how well it goes at forging new alliances to govern effectively and steer the economy will be closely watched in the coming years,' the review said.
Moody's Analytics said that the reduced political stability and the need for consensus building that is inherent with a coalition government, might erode investor confidence in the near term.
For the next five years, if not more, Moody's said that India's growth trajectory would be determined by the effectiveness of policies implemented by the coalition government.
'The results mean dynamics are about to change in Parliament. Coalition partners will gain influence and leverage in policy decisions, allowing for a more inclusive approach to governance,' the agency said.
It added that the election results sooth concerns held by some that if the BJP won a large enough majority, it may have pursued Constitutional changes that worked against secularism.
'That said, the BJP will need to use the tools of negotiation and compromise to maintain a cohesive government. This will likely slow decision-making and potentially dilute some of the party's key policy initiatives,"'the election review said.
The review also highlighted the market's response to the announcement of results, in which the nifty 50 and the BSE Sensex, fell more than 5 per cent on the results day, in the biggest one-day retreats in four years.
'They have since regained most of that ground, but markets will be wanting to see how the new-look government goes about addressing longstanding challenges such as inflation, high unemployment, and socio-economic disparities,' Moody's Analytics said.
'Other key areas to watch include capital expenditure allocated to infrastructure development, manufacturing and social services,' Moody's said.
The BJP, which won 303 seats in 2019, was tipped to secure 360 to 399 of the 543 contested seats this time around. It got 240.
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