Third term Modi: a coalition government to pursue India’s economic growth
India’s Prime Minister Narendra Modi’s third term was inaugurated on 9 June and his party showed its majority in parliament on 24 June. He will be only the second Indian leader to have been elected three times in succession, matching the record of the first post-independence prime minister, Jawaharlal Nehru. But there will be one distinctive change in the nature of the third Modi term: for the first time in his political career he will have to rule through a coalition government.
In the run up to the elections every exit poll and Modi’s Bharatiya Janata Party’s (BJP) internal numbers had predicted a single majority-party largely in line with Modi’s landslide victory in 2019. Instead the BJP lost 63 seats and won only 240 seats in India’s general elections. It remains the single-largest party in the lower house of parliament but well short of the 272-seat halfway mark. With other members of its National Democratic Alliance (NDA) the ruling coalition has a comfortable 292 seat majority.
The BJP will have to rely largely on two regional parties the Telugu Desam Party (TDP) and the Janata Dal United (JDU) to pass legislation. Neither of them have national aspirations and are largely supportive of both Modi and his economic reform agenda. Their demands on the coalition will largely be about BJP support for their economic and political targets.
Unhappy voters. The BJP and its allies lost more seats in northern and western India, its traditional electoral bastions, than was expected. The biggest surprise was a loss of 29 seats in Uttar Pradesh, the country’s largest state and the backbone of the BJP’s recent electoral dominance. It also fared poorly in the second-largest state of Maharashtra, losing 23 states – although that was less of a surprise given a six-party contest that had made forecasting difficult. The only consolation was that the BJP and its allies made major inroads in southeastern India, along the Bay of Bengal littoral, picking up a net 33 seats. The BJP could still argue that its vote share fell only by 0.8% from the 2019 election and that, in a third of the seats it lost, the margin of defeat was less than 5%.
The BJP’s losses can be attributed largely to widespread unhappiness over the employment situation and inflation. Surveys had shown about a third of Indian households believed they were as poor if not poorer than they were in 2019. Pollsters seem to have incorrectly concluded that other considerations like religious politics and welfare programs would override this resentment.
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The surprise in Uttar Pradesh seems to have been caused by the defection of Dalits, the lowest caste in the Hindu hierarchy, and a group badly affected by pandemic-induced job losses. These castes were also influenced by claims a BJP supermajority would lead to constitutional amendments that would do away with caste-based job reservations. More troubling for Modi is that while his approval job – 70% according to Morning Consult’s ranking of global leaders and the highest on the charts – his success rate in swinging constituencies where he personally campaigned fell by nearly half.
While there have been concerns that the Modi government had become increasingly intolerant of dissidents and had placed curbs on India’s boisterous civil society, there is little evidence this had resonance with the vast majority of voters. Such behaviour has also been the hallmark of previous Indian prime ministers who commanded a parliamentary majority, including those from the liberal-left Congress Party.
Religious nationalism and economics. Similarly, the BJP’s brand of religious nationalism was of little concern to the electorate, in part because much of the Hindutva agenda of correcting perceived legal and administrative biases in favour of religious minorities has already been achieved. Modi himself had begun to reach out to elements of the Muslim community in the runup to the elections though he quickly abandoned this during the campaign when it seemed to weaken the BJP’s voting base. The latest elections saw the BJP increasing its share of Christian and Sikh votes and its Muslim vote share falling by one percentage point to 7%.
The key question is what difference will the election results make to Modi’s ambitious policy agenda, especially in terms of transforming India’s economy. In his first post-election speech, Modi iterated his campaign’s main economic plank: make India competitive enough to become a global manufacturing centre.
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The prime minister has privately told his officials that plans for a 100-day program of extensive economic reforms will go ahead without any modifications. He has appointed a cabinet dominated by members of his ruling Bharatiya Janata Party (BJP), and he has kept in place his ministers for the key portfolios of home, finance, foreign affairs, and defense. Only five of the 30 cabinet-rank positions were assigned to coalition partners – which, except for civil aviation, are of minimal economic importance.
Neither of the two BJP allies are opposed to Modi’s economic agenda, though the left of centre JDU may have reservations about easing land acquisition for infrastructure and privatization. The TDP, if anything, is even more gung ho about reforms than the BJP.
Reform effect. The reform agenda will be affected in three ways. One, a weakened Modi will have to negotiate with the right wing members of his party, many of whom have been uncomfortable with his embrace of foreign investments and market economics. Two, though his allies may have no principled objection to most of his reforms, each piece of legislation will require Modi to offer a quid pro quo in some other policy space. This process is not insurmountable, but tends to slow down the reform process. Three, the primary demand of both parties will be extensive central government grants for their two states both of which are poor and financially strapped. This may require Modi to compromise on his otherwise tight fiscal policies.
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Much of the existing economic reform agenda does not require legislation, rather the notification of rules or administrative changes. These include reforms in the digital economy, the financial sector and the constantly evolving industrial policy. It is state-level reforms like easing of land acquisition, corporatizing agriculture and introducing market-based power pricing that will become more difficult. One reason is that a reinvigorated opposition is likely to become more active in protesting such moves. Arguably Modi’s most difficult task will be to learn how to further policy through political negotiations rather than diktats based on technocratic debates. In his first speech in the new parliament, Modi was conciliatory and spoke of ruling through “consensus.”
The greater challenge for Modi will be managing discontent within the BJP. The Rashtriya Swayamsevak Sangh (RSS), the religious-political organization from whose ranks most BJP leaders arise, has been unhappy over Modi’s failure to consult it about major policy decisions. In fact, tepid mobilization of the RSS cadre was a contributory factor to the BJP’s seat losses.
The RSS’s brand of economics has a strong nationalistic streak. It is unenthusiastic about foreign investment and unhappy with privatization. Modi’s team thinks this hesitancy can be overcome by broader engagement and a few concessions. For example, the BJP party president, J.P. Nadda, who had publicly downplayed the RSS’s importance during the elections, has been given a lowly cabinet post in a clear demotion from his previous role. A key test will be whether planned privatizations and sales of stakes in state-owned firms will advance during the current fiscal year as well as the breakup of the main state-owned defense research and manufacturing firm.
There is a need for further economic reforms as India’s economy, though it clocked 7% GDP growth last financial year, has a number of weak points. The most immediate is that GDP growth is being upheld by government capital spending, largely on infrastructure. While that is a net positive, it is not fiscally sustainable given India’s high debt-to-GDP ratio – about 82%. Nearly a quarter of government spending is dedicated to interest payments. Modi has placed India on a tight fiscal path which does not give him much leeway regarding government spending.
Priming the pump. The reason why New Delhi has been priming the pump is that private consumption has been largely flat for the past three years. The immediate reason is evident. The pandemic’s legacy has been a sharply K-shaped (i.e. strongly uneven) economic recovery with the top one-third of the population spending with abandon, the middle third being cautious about spending because of inflationary fears and the bottom third who are refusing to spend. This, in turn, has meant private capital expenditure has been growing only slowly as corporations wait to see if more consumption takes place.
The Modi government has been trying to get a virtuous economic circle started where consumption recovers strongly, private capital expenditure begins to flow and the GDP rides on multiple engines. Its infrastructure spending is part of that story, so are its hopes for a good monsoon in July-August, and its continuing welcome to trade and foreign investment. Much of the reform effort over the next year will be designed to get this wheel turning even while laying the grounds for a more sustained economic growth path.
One area where the new government can expect to maintain total continuity is foreign policy. Modi has retained his foreign policy team and plans to continue to move India strategically closer to the United States, driven by a common concern about China, a growing partnership in strategic technologies, and, at least when the Democrats are in power, a desire to ensure India takes a green energy path. The US national security advisor, Jake Sullivan, was among the first foreign visitors to come to India after the elections and underlined that the crucial bilateral strategic technology and defense relationship would continue and even encompass new sectors like space.
The next few months will see India and China move to reduce tensions along their common border. At present, the relationship has become abnormally strained with no airplane flights, no journalists and almost no people-to-people exchange. Beijing has signaled that it is prepared to walk back its 2020 border incursions if India is prepared to normalize relations in other areas. Modi, in an interview, has signaled his readiness on this front and this has already led China to appoint an ambassador after a nearly three year gap. The countries will remain strategic rivals and India will continue to screen all Chinese investment in the country and diplomatically keep the other government at arm’s length.
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Persian gambit. The Modi government is making a medium sized gamble on the United Arab Emirates and Saudi Arabia and their commitment to the strategic connectivity project that the two countries are pushing. These plans come under various names – I2U2 and IMEC among others – but are all about building a regional architecture with a hub in the Persian Gulf. The two government have committed $ 90 billion to the east corridor, connecting India to the Gulf. But the whole plan is attracting obituary writers following the Gaza conflict as much of this connectivity runs through Israel. The UAE in particular has signaled its intention to double down on this, at least when it comes to India.
Another side bet that will continue will be Russia. India believes that while Russia has less and less to offer strategically, maintaining a relationship ensures Russia is neutral when India and China go head to head. But India is slowly winding down its purchases of Russian weapons and moving to a newer relationship revolving around energy and normal trade. While this has been less than applauded by Europe, the Russia policy has received approval from the United States and Indian firms consult with the US Treasury regularly to ensure they do not violate transaction rules.
Modi wants his third term to be about building a lasting economic legacy. His campaign slogan was a promise to create a “Vikshit Bharat” – a developed India. The election results will slow him down though not fundamentally undermine his ability to push through policy. A larger question is whether he wants or will be allowed to run for a fourth-term. Already succession struggles are breaking out in the ranks of the BJP because of this uncertainty. The belief, however, is that Modi will focus on growing the economy for the next three years after which he will have restored his political standing with the public and within his party.
