Maharashtra elections: As state gears for a high-stakes poll battle, Macquarie issues a fiscal warning

Maharashtra's upcoming state elections have become a focal point for both political analysts and market observers, with Macquarie highlighting the event as crucial for India's future trajectory. 

Following the NDA's disappointing performance in the recent Lok Sabha elections, Maharashtra—with its 48 Lok Sabha seats and status as India's economic powerhouse—has emerged as a critical battleground. 

The recent shift in political dynamics underscores this importance. According to Macquarie Research, the Maha Vikas Aghadi (MVA) alliance gained significant ground in the Lok Sabha elections, capturing 63% of the seats, compared to the National Democratic Alliance (NDA), which secured just 35%. This marks a dramatic shift from the current Vidhan Sabha, where the NDA holds 66% of the seats and the MVA just 23%. 

This swing in favor of the MVA could have profound implications for the state’s political landscape.

Economically, Maharashtra plays a pivotal role in India’s overall growth. The state contributes the largest share to India’s GDP, accounting for 13-14%, and boasts a per capita income that is 30% above the national average. 

It also holds a 16% share in the country’s total exports and leads in innovation, with 19% of startups recognized by the Government of India. Maharashtra has consistently attracted the most Foreign Direct Investment (FDI) in the country, underscoring its importance as an economic powerhouse. From FY17 to FY24, Maharashtra's State GDP saw a robust Compound Annual Growth Rate (CAGR) of 9.1%, rising from INR 21,981 billion in FY17 to INR 40,442 billion in FY24. During the same period, per capita income in the state grew at a CAGR of 7.8%, increasing from INR 163,726 in FY17 to INR 277,603 in FY24. This strong economic trajectory further emphasizes the state's critical role in India’s overall development.

However, investors are growing increasingly concerned about the state's reliance on populist freebies, which could push the fiscal deficit beyond sustainable levels. 

A fiscal warning

Maharashtra's Deputy Chief Minister recently unveiled a budget heavy with populist measures, including cash aid for women in low-income households. Macquarie warns that these handouts could drive the fiscal deficit well beyond the 2.6% projected for FY25, potentially exceeding the central government’s cap of 3% of GSDP. 

"Taking into account this additional supplementary demand and the revised nominal GDP projections, the fiscal deficit for FY25 is expected to exceed 3 percent, which we view as a serious concern," noted Macquarie. 

This scenario could compel the state to cut back on capital or revenue expenditures, posing significant risks to its economic stability.

The uncertainty surrounding the election dates adds another layer of complexity. The Election Commission has delayed announcing the schedule for Maharashtra’s Assembly elections, citing logistical challenges, ongoing elections in Jammu & Kashmir, and the rainy season, along with upcoming festivals. 

This decision, coupled with a fragmented political landscape—featuring four key regional parties, including two factions each of Shiv Sena and NCP—makes the electoral outcome unpredictable. 

“We think looking at current opinion polls, exit polls, and even at past Vidhan Sabha election outcomes will be futile, considering that regional voters now have to make a choice between four parties instead of two, and there are only a few differing ideologies and approaches between the four parties,” Macquarie observed.

Infra worry

Macquarie also raises concerns that an MVA-led government might deprioritize key infrastructure projects, a focus of the BJP-led Maha Yuti alliance. “Hence, we think it becomes imperative to closely track some of the major projects that have been planned in the state and the implications for companies that are involved in executing those projects,” Macquarie concluded.