India elections: Expect reforms and economic populism under Modi 2.0

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Pratyush Rao

Pratyush Rao

India elections: Expect reforms agenda to go hand in hand with economic populism under Modi 2.0

Having finally concluded its gargantuan voting process, India is on the cusp of electing a new government that will determine the direction of the country for the next five years. Few expect the ruling Bharatiya Janata Party (BJP) to lose its ruling status – but what once appeared to be a cakewalk for Prime Minister Narendra Modi has in recent months turned into a much hotter contest, exacerbated by the fact that even slight swings in vote share can result in dramatic shifts in seat shares for parties in India’s first-past-the-post system.

Discerning the “hawa”

While the sheer size and associated logistical challenges of Indian elections have become a cliché, few outside the country have tracked the direction of the “hawa” (mythical political wave) which offers vital clues about how the results may eventually play out. Unlike the 2014 campaign, when a strong pro-Modi and anti-Indian National Congress party (Congress) wave led to a landslide victory for the BJP, the 2019 elections have been characterised by the absence of any overarching dominant theme. In recent months, Congress – which was reduced to 44 seats in the 543-seat lower house in 2014 – has attempted to retrieve political space by tapping into public discontent, particularly over the country’s mounting agrarian distress and a brewing jobs crisis. However, heightened military tensions between India and Pakistan in February distracted voters from Modi’s economic track record and re-focused the debate on national security issues.

In recent weeks, political parties and key figures have spent more time hurling insults than debating policy proposals to tackle the country’s challenges: a faltering economy, growing unemployment, a highly indebted banking sector and an urgent need for military modernisation. Other issues that raise questions about the health of Indian democracy include growing Hindu majoritarianism that has manifested itself in a wave of violent mob lynching’s by vigilante groups against Muslims and lower-caste Dalits over beef consumption, as well as growing questions over the credibility of state institutions. For instance, investors have in recent months expressed growing incredulity about India’s GDP numbers, prompting many of them to adopt alternative benchmarks.

Back to what we know

Parties have resorted to their traditional play book of identity-based politics to shore up support. Nowhere is this as evident as in Uttar Pradesh (northern India), a state with a population bigger than Brazil where two main regional parties – once bitter rivals – have created a powerful caste-based alliance called the “Mahagathbandhan” (Grand Coalition). In so doing, they hope to avoid cannibalising each other’s votes, which would play to the BJP’s advantage. Fighting back, the BJP has pushed a parochial Hindu majoritarian agenda in the 2019 campaign in order to hold on to its core vote base, seemingly in anticipation of other losses. This has included extreme lengths, such as the fielding of a firebrand Hindu holy woman who is facing terrorism charges; a far cry from the promises of progress that dominated Modi’s 2014 campaign.

Advantage Modi

But the powerful Mahagathbandhan alliance in Uttar Pradesh has not been scalable at the national level and even in this respect the BJP has been nimbler, offering not to contest seats of coalition partners in states like Maharashtra (western India) and Tamil Nadu (southern India).

Congress has also been hobbled by what hobbled it in 2014: the lacklustre leadership of its leader Rahul Gandhi, who despite cultivating a more assertive persona this time around has struggled to be taken seriously. He is still seen as a political naïf and a privileged scion, contrasting with Modi’s down-to-earth, decisive image.

Money has also talked. The BJP has run a slick campaign and dominated newspaper front pages, television screens, social media posts and billboards – because it can afford to. Since February, the ruling party has spent six times more than Congress on social media advertisements, while Modi dominated nearly three times as much television airtime compared with Gandhi in the crucial last campaigning weeks. The advantage has also extended to the skies, with the BJP hiring most of India’s chartered planes and helicopters, literally grounding their opponents’ campaigns.

The art of coalition management

Nonetheless, the BJP will struggle to replicate the scale of its 2014 win due to anticipated losses in Uttar Pradesh and other Hindi heartland states. The BJP lost three crucial states – Madhya Pradesh (central India), Chhattisgarh (central India) and Rajasthan (north-western India) – to Congress in state elections in late 2018. These likely losses will undermine the BJP’s parliamentary majority, but it nonetheless remains likely to be the party that wins the largest share of lower house seats. That is because losses in the Hindi heartland states will partially be offset by wins elsewhere, thanks to concerted grassroots campaigning. The BJP is also better placed to attract regional parties that are currently unaligned – though this would test Modi’s abilities as leader of a coalition government, and the BJP does not have a successful track record in running coalitions at the state level.

Expect reforms to be decentralised

Coalition (and minority) governments in India have a strong record of delivering high rates of economic growth, and a return to a coalition government in itself is unlikely to result in policy paralysis. However, the locus for good governance may further shift away from New Delhi to some of the more progressive state governments such as Andhra Pradesh (south-eastern India) and Telangana (southern India). That means the prospect for big-ticket reforms – especially those driven by the federal government – will become less likely, unless state and regional parties are involved. Reforms will likely be more incremental, with state governments taking more of a lead; the operating environment is likely to be more uneven and prone to regional variations.

In contrast to the centralised federal decision-making structures, coalition dynamics will also necessitate more intra-party consultations, potentially slowing down decision-making, including around politically contentious land and labour reforms. However, such robust scrutiny of policy is likely to mean that where measures are passed, they will be more sustainable. This reliance on regional allies will also make the prospect of some of the arbitrary and abrupt policy decisions taken by Modi in his first term – such as the 2016 demonetisation move – less likely, arguably providing increased policy stability for foreign investors. Coalition compulsions may also keep the BJP’s Hindu majoritarian instincts in check, though fringe groups loosely affiliated to the BJP will continue pushing the Hindu nationalist cause in BJP-ruled states.

Populism and economic modernisation are not mutually exclusive

Modi 2.0 will inhabit the roles of both the economic moderniser as well as economic populist, contrary to his supporters and critics who have often previously sought to characterise him as either one or the other.

He will likely continue efforts aimed at streamlining the 2017 Goods and Services Tax (GST), while continuing to empower the Insolvency and Bankruptcy Code (IBC) regime to tame the USD 150bn debt accumulated by the banking sector. But do not expect him to carry out a wholesale privatisation of state-owned banks or loosen the political control over lending decisions (which led to the debt crisis to begin with).

Similarly, increased pressure over rural distress and unemployment will stoke Modi’s economic populist instincts, which will likely see an increased focus on rural spending and handouts aimed at supporting small and medium-sized enterprises (SMEs). A new draft data protection law – which has elements of data localisation and stringent punishment for cross-border data transfers – along with the new e-commerce guidelines introduced in February 2019 (which seek to support local Indian start-ups) are other potential flashpoints which will intensify India’s ongoing trade disputes with the US in the coming months.

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