Noting that there has been a rise in “ethnic tensions” and “controversial comments” from various members of the Bharatiya Janata Party, Moody’s Analytics said Prime Minister Narendra Modi must keep his party members in check or risk losing domestic and global credibility.

“Looking beyond the business cycle, the government’s reform agenda needs attention to achieve long-term growth,” it said in a report ‘India Outlook: Searching for Potential’. Stressing that the politics needs to improve, the report pointed out that the government does not have a majority in the Rajya Sabha and such provocations could not only lead to violence, but also hamper the chances of getting crucial reform Bills passed by Parliament.

“Along with a possible increase in violence, the government will face stiffer opposition in the Upper House as debate turns away from economic policy,” it said. Key economic reforms, including the passage of the Land Acquisition Bill, a national Goods and Service Tax, and revamped labour laws can boost growth, but are unlikely to be enacted by Parliament in 2015, it said.

However, ongoing elections in Bihar could prove “pivotal to Modi’s leadership”, Moody’s said, adding that a win in the State could help the BJP secure a majority in the Rajya Sabha.

Though the agency remained optimistic about the economy and pegged the growth rate at 7.6 per cent in 2015 and 2016, it said it is unclear whether India can deliver the promised reforms and hit its growth potential.

“Undoubtedly, numerous political outcomes will dictate the extent of success,” the report noted, adding that investor optimism about the country’s economic prospects has begun to fade.

The economy grew at 7.3 per cent in the quarter ended September 30, Moody’s said, adding that this is below the potential of 9-10 per cent growth.

While low interest rates will buttress the economy in the short term, external headwinds are impacting exports, it said.

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