INSIGHT: Coalition government to rule India as Modi’s BJP suffers major setback

MUMBAI (ICIS)–A Bharatiya Janata Party (BJP)-led coalition government is expected to assume office in India, with a third term for incumbent Prime Minister Narendra Modi which should ensure continuity of most economic policies.

• BJP secures 240 seats in Lok Sabha, down from 303 in 2019
• India targets sizeable share in global manufacturing pie
• Legislative process for reforms faces possible delays

The BJP-led National Democratic Alliance (NDA) has won the elections, with a tally of more than 290 out of a total of 543 seats in the Lok Sabha or lower house of parliament, ensuring a third consecutive five-year term for Modi’s political party.

The numbers, however, were well below expectations of 400 seats.

BJP alone secured less than half of the total seats available at 240, below the required 272 for an outright majority. In 2019, the party had secured 303 seats.

India, a south Asian emerging market giant, held its national elections over the past six weeks until 1 June. It was the world’s biggest democratic elections, with nearly 970 million eligible voters.

“The BJP-led NDA alliance is a pre-poll alliance, and hence, we see less friction in the government formation exercise. Prime Minister Modi in his victory speech re-affirmed his commitments to reforms and growth,” Indian financial services firm Motilal Oswal said in a report on 4 June.

GDP GROWTH ROBUST
The Indian economy has emerged as among the top-performing economies in the world, logging an 8.2% GDP growth for the fiscal year ending March 2024, with the fiscal Q4 growth at 7.8%.

The Reserve Bank of India (RBI) forecasts a 7% GDP growth for the current fiscal year 2024-25, based on the central bank’s annual report released on 30 May.

“The Q4 GDP growth data for 2023-24 shows robust momentum in our economy which is poised to further accelerate. As I’ve said, this is just a trailer of things to come,” Modi said on social media platform X on 31 May.

“Fundamentally, India is witnessing its own mini-Goldilocks moment with excellent macros, solid corporate earnings,” Motilal Oswal said in a report dated 3 June.

Confederation of All India Traders (CAIT) secretary general Praveen Khandelwal said: “We expect the government to formulate new initiatives, provide policy support and take necessary steps to boost domestic trade and exports,”

As part of an election pledge to transform India into a global manufacturing hub, the BJP government wants to offer subsidies for domestic production modelled on recent packages for semiconductor firms and electric vehicle makers, newswire agency Reuters reported on 3 June.

The government plans to increase India’s share of global manufacturing to 5% by 2030 and to 10% by 2047.

To increase the country’s manufacturing capacity, the government is expected to introduce new laws, tax reforms, trade pacts and duty reforms to promote ease of doing business.

On its third term, Modi’s government could bring about reforms in all factors of production including land, labour, and capital, Indian finance minister Nirmala Sitharaman had cited in February.

There were also plans to lower trade barriers to help develop domestic industries.

The new government is expected to reduce import duties on various components used in the textiles, engineering goods and other industries. India has already reduced tariffs on several mobile device components to boost production and make exports competitive.

POSSIBLE DELAYS IN LEGISTATIVE REFORMS
With the party’s weakened grip in the lower house, however, legislative reforms such as proposed changes to the goods and service tax (GST) may be delayed.

The GST – a single tax that replaced multiple indirect taxes – was introduced in 2017.

The government had proposed certain amendments to the GST in the national budget announced in February, which included penalties and changes in procedure of applying the tax.

Any proposal to hike the tax rate as part of fiscal reforms is likely to be resisted.

Plans to amend India’s Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act of 2013, which would make it easier for industries to acquire land may also be subjected to delays.

The proposed changes are aimed at freeing acquisition of land from existing restrictions, for certain types of projects like those related to defence, infrastructure and industrial corridors.

A third term for a BJP-led government is expected to ensure continuity in India’s economic landscape, with increased focus on clean energy, infrastructure, and manufacturing.

“Regardless of the election outcome, policy focus will remain on sectors considered strategic by the major domestic political parties, including renewable energy, automotive, electronics, textiles, digital infrastructure, logistics, food production and services,” research agency S&P Global Market Intelligence had said in a report on 29 May.

However, as no political party has been able to secure majority seats by itself, the BJP will be forced to rely on its coalition partners.

“A substantial cabinet reshuffle is almost certain in this scenario, with portfolio allocation being distributed across coalition parties and with policymaking becoming decentralized,” S&P stated.

The government’s policies will focus on encouraging macroeconomic growth to keep India on track to become the third-largest contributor to global GDP by 2030, it said.

Also high on the government’s list of priorities are infrastructure, clean energy sector development, as well as promoting trades with bilateral partners.

India is exploring free trade agreements with the UK and the EU, after signing a deal in March 2024 with the European Free Trade Association (EFTA) comprising Switzerland, Norway, Iceland and Liechtenstein.

In the Middle East, the south Asian country had signed a trade agreement with the UAE in May 2022 and has recently concluded negotiations with Oman.

Insight article by Priya Jestin