A surprise outcome from India’s general election, where the incumbent Bharatiya Janata Party (BJP) failed to win an outright majority in the Lok Sabha, means that Prime Minister Narendra Modi has emerged weaker with a diminished mandate. However, with 240 members of Parliament and the BJP emerging as the single largest party, this is also not a complete repudiation of the Prime Minister. With the support of the pre-poll National Democratic Alliance (NDA), Mr Modi has returned as prime minister for a third tenure.  

We analyse the risk implications for businesses under a new-look Modi administration, which is reliant on its alliance partners for a majority, as well as the outlook for India’s economic growth and structural reforms in the years ahead.  

  • Modi’s government is reliant upon its coalition partners, elevating political instability risk of the government lasting its full five-year term. Even as businesses in India start contemplating a post-Modi scenario, there could be renewed opportunity for incremental reform that could enhance efficiency and efficacy for companies. 
  •  Broad economic policy continuity is expected, with the government actively pursuing foreign investments to ensure an expansion of the country’s manufacturing sector, infrastructure and renewable energy capacity.  
  • While the coalition government may continue to streamline the business environment, its will and ability to achieve large-scale structural reforms concerning labour and land acquisition will continue to pose significant operational challenges.  
  • The necessities of coalition politics are expected to keep controversial civil code and citizenship linked legislations to the side, easing reputational risks for companies.  
  •   A consensus approach to cente-state management including on revenue sharing of indirect taxes is expected to create more business opportunities in non BJP-ruled states.  

Modest Modi

Modi’s third consecutive term is a limited triumph, as the BJP will be forced to rely on alliance partners to form a coalition government. Its main allies, the Janata Dal United (JDU) and the Telugu Desam Party (TDP) enjoy tenuous relations with the BJP, as they have left and rejoined its National Democratic Alliance (NDA) multiple times in the past. 

So far both parties have indicated their commitment to the alliance, although their support may waver due to differences over ideology and the policy agenda. Even as political instability risks will be higher than during Modi’s first two terms, we expect Modi will complete his third term, offering a greater degree of policy continuity to investors.

Old wine, new bottle  

The necessities of coalition politics are likely to temper the BJP’s social agenda, and the party may have to put legislative changes aligning with its Hindutva ideology to the side, for now. However, the latent instability of the current administration does not necessarily signal significant economic disruptions. Modi 3.0, far from deviating too much from the economic priorities set out over the past decade, is likely to continue delivering fast-paced economic growth. Historically, coalition governments have delivered higher economic growth compared to single party governments.  

There is likely to be consensus among the coalition partners on the need to prioritise the expansion of India’s manufacturing sector. Since first elected in 2014, Modi’s government has sought to project India as a global manufacturing hub, and this effort has remained at the heart of his government’s economic policy. 

However, Modi’s inability to pursue land and labour reforms is likely to dent the manufacturing sector’s prospects. Given that Modi will want a stronger performance in upcoming local elections in Maharashtra, Haryana, Jharkhand, and Jammu and Kashmir, whose voters head to the polls in September 2024, there is likely to be greater emphasis now on promoting more labour-intensive sectors, such as automotives, food processing and textiles, with the aim of creating more jobs. Populist welfare measures, which the Modi 2.0 government eschewed in its interim budget for FY25 announced on February 1 2024, could make it into the agenda of the new government. India’s persistent unemployment and economic discontent in rural areas has been cited as one of the factors that dented the BJP’s electoral performance. 

Similarly, there are unlikely to be significant objections to public spending on infrastructure projects that will be critical for improving logistics in the country. The Modi administration will prioritise infrastructure development, as it will likely seek to align with the interests of alliance partners, while ensuring political dividends in the upcoming state elections.  

Finally, Modi’s “green agenda” is likely to remain intact, as the imperatives of reducing India’s carbon emissions and overall fossil fuel dependence are also likely to be shared by his coalition allies. The energy transition goals have a strong buy-in from non BJP-ruled state governments, which are seeking to expand energy production to offer cheaper and subsidised power to their electorate.  

Reforms checked  

Even as Modi’s policy agenda remains broadly intact, his government’s ability to spearhead it may be impacted. Besides the capital outlay on infrastructure projects, the Modi-led government had also earmarked USD 28bn in the form of incentives for the promotion of domestic manufacturing across 13 sectors. The government is now more likely to divert some of these funds towards welfare schemes as the BJP seeks to double down on consolidating its support base, particularly with an eye on state assembly elections.  

While efforts to attract private and foreign investments to fill this gap will intensify, their success will depend on overall improvement in the business environment. The coalition government will continue to build on the initiatives of Modi’s previous government to digitilise government approval processes and reduce the overall compliance burden. There will also likely be progress on further streamlining the existing tax system.  

However, broader structural reforms concerning labour and land – which Modi was unable to implement even with his previously bigger mandate – will be tougher to pull off now. Although some of India’s most far-reaching reforms in recent years were enacted by coalition governments, they required allies to work closely to build a consensus. This remains unchartered territory for Modi, who has no prior experience of needing the support of coalition partners to pursue his agenda.  

A more emboldened opposition is unlikely to cede any ground to Modi and will likely push back against all major decisions of the government through some level of street mobilisation. With a united and stronger opposition in parliament, the passage of any substantial reform or law is now likely to undergo prolonged delays. Until then, the absence of these reforms will continue to pose operational challenges to infrastructure projects, the manufacturing sector and even the execution of large-scale renewable energy projects.  

A new India?  

While the regulatory, operational and labour risks for companies will persist, the new political landscape should prompt businesses to look beyond Modi. For starters – given the apparent weakening of Modi’s personal brand – regional parties and state governments, particularly those led by non-BJP parties, are likely to have a stronger voice. The federal government may no longer be able to concentrate all its efforts towards promoting only a few key states for business opportunities.  

The previous Modi administration, for example, was accused of showing preferential treatment towards Gujarat and Uttar Pradesh. More states will now contend for a share of the newer opportunities, giving more options to foreign investors in India without the fear of significant political backlash from the federal government. TDP chief Chandrababu Naidu, for instance, is likely to leverage his party’s newfound importance to project the state of Andhra Pradesh’s potential as a manufacturing and investment hub.  

A greater scrutiny of local partners has also become more critical. The proximity of business partners to Modi and the BJP remains an advantage, but political exposure is likely to make businesses more vulnerable to political and reputational risks. Already, conglomerates considered close to Modi are facing significant media and opposition scrutiny, which is likely to escalate into increased legal challenges to government contracts and agreements secured by these businesses.  

Finally, reputational risks of doing business in an increasingly polarised India are likely to ease. Such concerns were driven by the growing perception of democratic backsliding in India, the overt centralisation of power in the prime minister’s office, the politicisation of law enforcement agencies and the aggressive pursuit of a communal agenda. A possible weakening of Modi’s power, the checks and balances created by coalition partners, and the potential peaking of Hindu nationalism as an electoral plank now forms the potential for a positive narrative towards India, particularly in international circles.  

Businesses operating in India should consider a post-Modi scenario in their long-term strategic plans and evaluate the downsides of their business partners’ emerging political exposure. As competition among states to secure foreign investment is likely to increase, businesses must carry out benchmarking and stakeholder assessments to make informed decisions on their next investment destination. While infrastructure and renewables will produce more opportunities for foreign investors, the manufacturing sector may face hurdles due to delays in critical labour and land reforms. More broadly, as India’s polity becomes more contentious, conversations surrounding political risk need to be pre-emptive now more than ever.  

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