• Modi's party gaining a beachhead in the south
•  Election a test of Modi's popularity ahead of 2019 polls
•  Result major setback for India's main opposition Congress

NEW DELHI: Indian Prime Minister Narendra Modi's ruling party was set on Tuesday to win the largest number of seats in a big southern state election, giving him momentum for a re-election bid next year and opening a path for more reforms.

A government in Karnataka led by the Bharatiya Janata Party (BJP) will help Modi silence critics who said his popularity had waned after the rocky adoption of a nationwide sales tax and a sudden ban on high-value notes late in 2016.

The BJP was leading in 105 seats in the election to the 225-member state assembly, the Election Commission of India said, with the opposition Congress party leading in 75 seats.

A party must have 113 seats to form a government and the BJP will probably have to seek the backing of smaller parties.

"The result provides some reassurance to the BJP that its popularity remains intact," said Shilan Shah, a senior India economist at Capital Economics.

"That could embolden the government to pursue reforms in future, including loosening foreign direct investment restrictions and moves towards privatization."

If it forms a government in Karnataka, the BJP and its allies would govern 22 of India's 29 states. A strong showing in the state, which has a population roughly that of France, allows Modi to aggressively push forward his reforms agenda without fear of political backlash.

It also gives the BJP a southern beachhead, besides its core base in India's north and west.

In the last four years, Modi has moved to boost the economy, but shied away from politically-sensitive reforms to revamp the labour sector and land acquisition, which the World Bank called for in March.

His government faced sniping in recent weeks over soaring fuel prices, a decision to privatise state carrier Air India and a lack of jobs for millions of young workforce entrants each year.

But Modi's victory in Karnataka, where he led the party campaign, showed he remains the top vote-getter in Indian politics, leaving Rahul Gandhi, the young leader of the main opposition Congress party, struggling.

A Pew survey in November found Modi still trumps Gandhi in popularity, with nine of 10 Indians expressing a favourable opinion of him and more than two-thirds satisfied with his direction for the country.

"The win definitely enhances the prospect of Prime Minister Modi for another term," said political commentator N. Ram.

The benchmark 50-share NSE index extended gains during the morning session to trade more than 1 percent higher as results pointed to success for the BJP.

MODI VS GANDHI

Karnataka, with a population of 66 million, is home to the technology hub of Bengaluru. It is the first major state electing an assembly this year, to be followed by three more.

Celebrations erupted outside the party headquarters in Bengaluru, with supporters shouting victory slogans and waving the party's flag as the results trickled in.

The loss of the state is a major setback for Congress and its president Rahul Gandhi, the fifth-generation scion of India's famed Nehru-Gandhi dynasty.

"His authority is weakened and it is difficult for the Congress now to stake a claim on the leadership of the opposition," said Satish Misra, a political analyst at the Observer Research Foundation in New Delhi, the capital.

Congress was "disappointed" with the results, said its spokesman Sanjay Jha, but he defended Gandhi's campaigning.

"He raised issues that mattered, unlike PM Modi, who indulged in hollow rhetoric," Jha told Reuters