NEW DELHI: Moody's Analytics on Friday said reduced political stability and the need for consensus building in a coalition government will likely slow decision-making and erode investors' confidence in the near term.
In a post-election note, Moody's Analytics said the Lok Sabha election results mean dynamics are about to change in Parliament, as coalition partners will gain influence and leverage in policy decisions, allowing for a more inclusive approach to governance.
"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," it said in a note titled 'India Election Review: Voters Force the BJP into Coalition Government'.
The BJP, which won 303 seats in 2019, bagged 240 seats in the 2024 elections.
The BJP-led NDA won 293 seats in the 543-member Lok Sabha, comfortably above the majority mark of 272.
Moody's Analytics said though Prime Minister Narendra Modi secured a third term in office, 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, it added.
"Reduced political stability and the need for consensus building that is inherent with coalition government might erode investor confidence in the near term," Moody's Analytics Associate Economist Aditi Raman said.
It said markets will want to see how the new-look government goes about addressing longstanding challenges such as inflation, high unemployment, and socio-economic disparities.
The effectiveness of policies implemented by the coalition government will determine India's growth trajectory for the next five years, it said.
The Union Budget will be an early indicator of policy priorities, including short-and long-term responses to some of those key economic challenges.
Other key areas to watch include capital expenditure allocated to infrastructure development, manufacturing and social services, Moody's Analytics said.