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How big a deal is Modi’s defeat in Delhi?

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Indian Prime Minister Narendra Modi's Bharatiya Janata Party suffered a humiliating defeat in Delhi state elections on Tuesday – its first major political setback – laying potential road blocks for its national reform agenda.

Aam Aadmi Party (AAP), or Common Man Party, grabbed 67 seats out of 70 seats in the Delhi assembly, the biggest ever victory margin for any party in the capital. The BJP won the remaining 3 seats.

Founded in 2012, AAP, led by former tax official Arvind Kejriwal, has captured the hearts and minds of disenchanted Delhiites looking to eradicate the rampant corruption that has plagued the country for decades.

While Delhi is not very significant in electoral terms, state elections are important for control over the upper house of parliament, where the BJP is in a minority. The decisive victory will allow AAP to send three of its members to the 250-member upper house, setting the BJP back further.

"Admittedly, the loss of Delhi is a setback for plans to consolidate power in the upper house, where reform bills are being stalled," Vishnu Varathan, senior economist at Mizuho Bank wrote in a note.

"Nevertheless, the reality is that with just 17 million population, Delhi's mandate does not translate into a wider rejection of BJP by India; especially corporate India," he said.

'Exception rather than trend'

While the Delhi election is indeed a blow for Modi, Rajiv Biswas, chief economist, Asia-Pacific at IHS agrees the outcome of the Delhi election does not translate to a nationwide trend.

"It's not surprising AAP performed strongly in Delhi because that's where it has its roots, so I don't think we can translate this result to a nationwide trend," he said. There are still questions over Kejriwal's credibility as a leader, Biswas said, given his party has yet to develop a comprehensive agenda beyond fighting corruption.

Nevertheless, while AAP may not be an immediate threat to the BJP, Biswas says the Delhi elections due mark an end to Modi's honeymoon period.

"Now the pressure is on Modi to focus on delivery. He's had his honeymoon period and now needs to get runs on board on terms of moving projects forward in areas such as [infrastructure] development," he said.

Sonal Varma, chief India economist at Nomura shared a similar view.

"The mandate in Delhi is in part against corruption and for clean governance, and AAP was successful in projecting itself as the champion of these ideas at the state level. In our view, at a national level people may still identify clean governance and pro-development politics with Mr. Modi; hence the BJP's loss in Delhi could be an exception rather than a trend," said Varma.

Focus shifts to bigger state elections

While the Delhi defeat is symbolic, analysts point out that upcoming elections in larger states such as Bihar, Tamil Nadu and West Bengal will be more important in deciding the BJP's tally in the upper house, also known as the Rajya Sabha.

Bihar elections are scheduled for the second half of 2015, followed by Tamil Nadu and West Bengal in the first half of 2016. The three states account for a total of 50 seats.

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To get around its lack of majority in the upper house, the BJP has so far resorted to using a series of temporary executive orders to push through contentious laws.

In late-December, for example, Modi passed an executive order to ease land-acquisition rules in sectors like power, housing and defense in order to kick-start billions of dollars in stalled projects. However, these will ultimately be difficult to sustain if parliament fails to approve them, analysts note.

"All said, the key to the reform process will be how BJP manages the Rajya Sabha, where it doesn't have a majority and may again prove to be a bottleneck in passing legislative reforms as it did in the Winter session," said Varma.