NEW DELHI: The rout of India's ruling Congress party in state polls will make it tougher for the government to pursue far-reaching, pro-market reforms that could revive faltering economic growth, analysts say.
Voters on Tuesday rebuffed Congress's bid for a comeback in India's most populous state Uttar Pradesh, where the party managed to increase its holding in the 403-seat assembly from 22 to just 29 despite campaigning hard.
Congress also suffered a surprise thrashing in the wheat-bowl region of Punjab, another big state in the mid-term elections that were seen as a test for the national government of Prime Minister Manmohan Singh.
"The best that can be hoped for is muddle-through policies" by the Congress government, Goldman Sachs analyst Tushar Poddar said. The poll results will not "give it the confidence to carry through (politically) unpopular reforms."
Investors have been waiting for the government to unleash a raft of reforms to decrease the economic role of the state, ease business regulation and open doors to more foreign investment since it was returned to power in 2009.
These are structural changes that analysts say are key to boosting growth on a long-term basis.
But recent attempts at reform have been hindered by a recalcitrant opposition as well as political allies, a string of corruption scandals and high inflation that have weakened Singh's government and gridlocked parliament.
Now the elections, in which Congress fared poorly in four out of five states, have further undermined the chances that Singh, architect of the first reform wave two decades ago, can push through a new contentious reform agenda.
"The policy drift in New Delhi is likely to continue" and "the possibility of an expeditious roll-out of reforms may come a cropper," Ajay Bodke, investment strategy head at Prabhudas Lilladher brokerage, told AFP.
Congress had hoped for a strong election showing to give it the clout to revive retail reforms allowing full entry to foreign firms, overhaul the pension and tax systems, and bring in new land laws to spur industrialisation.
Now Singh's government is left to limp towards the 2014 general elections relying on coalition allies such as the Trinamool Congress in West Bengal, led by the mercurial Mamata Banerjee.
The Trinamool will "continue to torment Congress's reformist agenda," said Bodke, adding the regional socialist Samajwadi Party, which swept the polls in Uttar Pradesh, may step up demands for more development funding from New Delhi.
The state polls setback comes as Finance Minster Pranab Mukherjee crafts his annual national budget, due on March 16, with the economy growing at 6.1 percent, its slowest pace since the 2008 global financial crisis.
The election results have dashed hopes that Mukherjee might present a reform-oriented budget and have heightened worries that he will balk at decisively reining in the ballooning deficit, analysts say.
The government "will be much more on the defensive," said Financial Express newspaper managing editor M.K. Venu, adding Mukherjee was now likely to present a "holding operation budget."
"The regional parties are known to be more populist, much more welfare-oriented. The regional parties will take a much tougher stand (on reforms) as we approach the 2014 elections," Venu told the NDTV Profit channel.
Election data shows India's politics becoming increasingly aligned along regional fault lines that will make long-term national economic policy-making even harder, analysts predict.
In the run-up to 2014, traditional tactics of populist free-spending to win votes "may be the only strategy left for (Congress) to fall back on -- which would be bad news for the markets," said Jay Shankar, chief economist at Religare Capital Markets.
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