Still smarting from a humiliating weekend electoral loss, the Indian government said yesterday it was undeterred and would push ahead with its economic reforms agenda.
Finance Minister Arun Jaitley, putting on a brave face after the ruling Bharatiya Janata Party's (BJP) loss in elections in Bihar, sought to calm investor jitters and urged the eastern state's Chief Minister Nitish Kumar - whose alliance won the key poll - to support the government's Goods and Services Tax in Parliament.
"I don't see it as a setback to the economy... structural reforms will continue. They should continue at a rapid pace," Mr Jaitley told Indian media.
Indian markets opened weaker yesterday and shares, bonds and the rupee fell to around six-week lows before recovering. Equities fell as much as 2.3 per cent before closing just over 1 per cent lower.
Prime Minister Narendra Modi last night attended a BJP post-mortem of what went wrong in Bihar. The party had hoped a win would boost its numbers in the Upper House, where state victories influence strength.
"We failed to estimate the popularity surge of the (rival) alliance... so the size of that coalition arithmetically became more than us," Mr Jaitley told a press conference after the party's assessment.
The loss in India's third most populous state was a major setback for Mr Modi, who had campaigned extensively there. Chief Minister Kumar and his "grand alliance" won 178 of the 243-member state assembly seats, while the BJP won 58 seats.
Mr Kumar's good governance record and people voting overwhelmingly for the alliance in all phases of the elections are seen as some other reasons for the BJP's defeat.
Analysts and economists said that the Bihar election was a wake-up call for the BJP-led government to focus more on reforms and economic development rather than a Hindu agenda. Concern has been growing about the activities of fringe right-wing groups emboldened after the BJP swept to power last year. A Muslim blacksmith was lynched last month by a Hindu mob that thought he had beef in his house. One BJP leader was later quoted as saying that Muslims must give up beef.
"The BJP now realises that the only way to stay in power is to move on the development of reform and not work towards isolating voters along religious and ideological lines. That is the only focus that will help it retain power after the five-year term," said Mr Rishi Sahai, a Delhi-based consultant.
"This (election defeat) will force the government to reach compromises with the opposition and negotiate outstanding legislature like the Goods and Services Tax. They are going to accelerate reforms," he said.
Ms Shaily Mittal, an economist focusing on India for MNI Indicators - a unit of Deutsche Bourse group - said the BJP's loss "signals disillusionment among voters with the (Modi) government" with "consumer confidence at a record low level".
Some observers believe too much was being read into state-level elections.
"This is a small part of a big picture on which investment decisions are made,"said Mr Madan Sabnavis, chief economist at Care Ratings.