The Bihar elections are crucial for the BJP as it does not have a majority in the Rajya Sabha or Upper House to pass key legislations.
Referring to the "ethnic tensions" in the wake of controversies over beef and other issues, Moody's today said that Prime Minister Narendra Modi must keep BJP members in check or risk "losing domestic and global credibility".
Stating that BJP does not have a majority in Rajya Sabha to pass crucial reforms and the Opposition was being 'obstructionist', Moody's Analytics said in a report that the government has also not helped itself in recent times with controversial comments from various BJP members.
"While Modi has largely distanced himself from the nationalist jibes, the belligerent provocation of various Indian minorities has raised ethnic tensions.
"Along with a possible increase in violence, the government will face stiffer opposition in the upper house as debate turns away from economic policy.
"Modi must keep his members in check or risk losing domestic and global credibility," the report said.
The comments from Moody's Analytics, the economic research and analysis division of Moody's Corporation, are the first by any major global institution over the recent political controversies in India.
Moody's Analytics, however, said "its commentary is independent and does not reflect the opinions of Moody's Investors Service Inc., the credit ratings agency which is also a subsidiary of Moody's Corporation".
The report titled 'India Outlook: Searching for Potential' further said that the ongoing assembly elections in Bihar could "prove pivotal to Modi's leadership".
"The BJP is not the incumbent (in Bihar), so a win here would help secure an upper house majority... Overall, 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 added.
Moody's projected India's GDP growth for September quarter at 7.3 per cent, while for the full fiscal it would be 7.6 per cent.
It, however, cautioned that Indian equities have also suffered from a loss in domestic sentiments and the failure to deliver on key reforms has faded the optimism.
"The Sensex has fallen around 11 per cent since the euphoria behind the new government propelled the stock market. But consistent failure to deliver key economic reforms has faded the optimism," the report said. "Key economic reforms could deliver greater potential GDP, as they would improve India's productive capacity. These include the land acquisition bill, a national goods and service tax, and revamped labour laws. They are unlikely to pass through Parliament in 2015, but there is an even chance of success in 2016," Moody's said.
"Looking beyond the business cycle, the government's reform agenda needs attention to achieve long-term growth. Prime Minister Narendra Modi's right-leaning Bharatiya Janata Party does not have a majority in the upper house to pass crucial reforms and has been met with an obstructionist opposition," it added.
PM Modi has announced a package of Rs 1.65 crore for Bihar, saying that it will change the fate of the state. He recently also took a jibe at the Nitish' meeting with a 'tantrik', whose footage was released by a BJP leader, saying "tantra mantra" cannot make a modern and progressive Bihar and its youths wanted laptops not amulets.
Promising rule of law and employment if BJP came to power, PM Modi said Bihar election is an opportunity to punish those who "looted" the state in the last 60 years including 25 years when '
bada bhai-chhota bhai' (Lalu-Nitish) ruled the state.