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The Modi Coalition’s narrow victory puts India’s growth plan at 8% risk

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(Bloomberg) — Indian Prime Minister Narendra Modi’s ambitious economic growth goals are in jeopardy after his party failed to win majority support in the election, leaving him more dependent on a coalition government to implement tough economic reforms .

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Modi’s Bharatiya Janata Party did not win enough seats in parliament to reach the 272 majority needed to form a government on its own. It will now be forced to work with its allies to exert power. Tuesday’s results were a surprise after exit polls predicted a bigger majority for the BJP-led coalition.

While a BJP-led government will likely still be able to continue its broadly pro-business policy approach, a weakened mandate means it may not have the political capital to push through difficult reforms – especially in the areas of labor and land rules, which, according to economists, are necessary to keep growth going.

The election results could also tilt the BJP toward more populist spending measures to shore up support, jeopardizing efforts to reduce the fiscal deficit.

“We think fiscal consolidation will still be a key focus, but there could be an opportunity to use the recent additional revenues for spending rather than reducing the deficit,” said Shreya Sodhani, economist at Barclays Plc.

Modi’s government has over the years taken decisive steps to reduce the fiscal deficit to 5.6% of gross domestic product in the fiscal year ended in March, compared to a high of 9.2% during the pandemic in 2020. The government had promised to reduce this further to 4.5% by 2025-2026.

India’s ability to reduce its budget deficit and public debt will impact its credit ratings, which are currently at the lowest investment grade levels. S&P Global Ratings recently flagged a possible upgrade in the coming months, citing the economy’s stronger fundamentals.

The weaker showing for the BJP could also force it to focus on raising incomes and creating jobs to gain support for its broader pro-business approach, economists said.

“Modi’s biggest problem is inadequate jobs even though there is high economic growth,” said Shumita Sharma Deveshwar, chief India economist at GlobalData.TS Lombard. “It’s clear that people are feeling the pressure and that’s because people’s incomes aren’t rising.”

Employment emerged as a key election issue, with opposition parties criticizing the government for failing to create enough jobs, especially for young people. The Center for Monitoring Indian Economy, a private research firm, estimates that the unemployment rate among people between the ages of 20 and 24 is 42.6%. Official employment data in India is considered incomplete by most economists.

‘Viksit Bharat’

More than half of India’s 1.4 billion people are under the age of 30, giving the country a significant advantage over countries like China, where the labor market is aging and shrinking. However, poor education and high dropout rates mean that young people are ill-equipped to take on the jobs needed to sustain India’s high growth rate.

Modi’s ambitious growth targets will now also come under scrutiny. He had pledged to make India a developed country by 2047 – the centenary of the country’s independence – a goal encapsulated in the Viksit Bharat slogan, which was central to the BJP’s election manifesto. Although the vision is not clearly defined with specific targets, some economists estimate that India needs growth of more than 8% over the next quarter century if it wants to be a high-income country.

Modi claimed victory for his coalition on Tuesday and reiterated the 2047 target.

“We will take steps towards the developed countries target in the next term. The country will see a new chapter of big decisions,” the Prime Minister told supporters at the BJP headquarters in New Delhi.

The economy grew 8.2% in the fiscal year that ended in March, and the central bank forecasts rapid growth of 7% this fiscal year. Economists expect Modi’s infrastructure spending, which has contributed to growth, is likely to continue, albeit possibly at a slower pace.

To achieve a growth rate above 8% on a sustainable basis, India needs to undertake difficult economic reforms around labor and land policies, economists said. For example, labor laws that make it easier to hire and fire workers were passed by Parliament in 2019 and 2020, but have yet to be implemented by state governments. Companies also complain that land acquisition is complex and hinders investment.

Declining support for the BJP means it will have less political capital to push through tough reforms.

“Market reforms such as those in land, agriculture and labor are now off the table,” said Madhavi Arora, economist at Emkay Global Financial Services Ltd. Privatization and asset sales are also at risk, she said.

Alexandra Hermann, chief economist for Asia macro at Oxford Economics Ltd., said the election outcome was unlikely to have an immediate impact on the central bank, which is expected to keep interest rates unchanged on Friday.

The Reserve Bank of India “is committed to maintaining independence from political influence and will therefore only consider more rapid interest rate cuts to the extent that the economy deteriorates significantly in the coming months,” she said.

–With help from Shruti Srivastava, Swati Gupta and Dan Strumpf.

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