If Modi is forced to rethink his pro-business policies, investors will suffer, notes Andy Mukherjee.
India's prime minister has tasted his first defeat at the polls since last year's impressive general election victory.
For now, losing control of Delhi's state assembly is a minor embarrassment for Narendra Modi. But his upstart rival, the anti-corruption crusader Arvind Kejriwal, could use his perch as the state's chief minister to take his left-wing rhetoric national.
If that forces Modi to rethink his pro-business policies, investors will suffer.
With votes still being counted on Feb. 10, Modi's Bharatiya Janata Party looked set to win fewer than 10 of the 70 seats in the assembly, according to India's Election Commission. "Aam Aadmi" -Common Man Party - swept the ballot.
It's not the first time that Kejriwal has pulled off an electoral coup.
Last year, too, he won control of the assembly, but resigned as chief minister after just 49 tumultuous days.
Assuming he doesn't repeat the same mistake, some high-profile skirmishes are guaranteed. During his previous stint, Kejriwal accused Mukesh Ambani's Reliance Industries of causing an artificial shortage of gas and threatened to cancel younger brother Anil Ambani's license to sell power in Delhi.
What might he do next? Modi government's tweaks to a land acquisition law offer the agitator the perfect opportunity to appeal to rural voters.
If Kejriwal can rally farmers against the amendments, it would become almost impossible to acquire land for badly needed infrastructure projects.
The other threat is to electronic commerce. The industry is India's hottest investment bet, with global giants like Amazon , SoftBank and Alibaba vying for a spot. Kejriwal's staunch opposition to online retailing seems to have endeared him to Delhi's traders and small shopkeepers, who have traditionally backed the BJP.
If the Modi government stymies the growth of e-commerce to retain its core voters, investors may take fright.
None of these risks are immediate. The Common Man Party has hardly any presence in India's parliament and may initially focus its energy on Delhi.
Still, with Sonia Gandhi's Congress Party struggling for survival, Kejriwal could eventually challenge Modi on the national stage.
Losing Delhi could go from being a minor embarrassment to a major setback.