ReachX logo

Economic challenges facing India's Narendra Modi after an emphatic election victory

Publication Date: 05 Jun 2019 - By Anuj Dhawan By Anuj Dhawan
Actionable
Differentiated

Macro Environmental, Social & Governance Multi Asset Asia ex-China

In India’s recent 2019 general elections for the formation of the Lok Sabha, or the lower house of the country’s Parliament, an estimated 600m people voted to elect the central government for the next five years. 

Over the course of nearly two months spread over April and May, split across seven phases and at an estimated cost of $7bn, the election process concluded on 19 May, returning the incumbent Prime Minister Narendra Modi, leader of the BJP and the ruling NDA, to power with an emphatic victory.

The challenge of Congress Party and UPA leader Rahul Gandhi faded away as Modi’s BJP bagged 303 parliamentary seat on its own, with the wider NDA alliance claiming 353 seats out of the 543 member Lok Sabha, well ahead of the 272 seats needed to form a government

Having been sworn in on 30 May; Modi now has a big task on his hands, but the NDA victory was remarkable due to many reasons:

• Demonetisation and Goods and Services Tax (GST) were two economic reforms during the previous tenure of the NDA. While on one hand these reforms aimed at formalizing a larger chunk of India’s economy, these measures may have also caused some level of demand destruction due to their debilitating effect on cash-oriented businesses, which formed a large part of the economy. Congress led UPA’s minimum income guarantee scheme (NYAY), as an election sop, had been proposed as the solution to the consumption weakness. Thus, NYAY was seen as not only potentially puncturing the NDA’s juggernaut but also launching Rahul Gandhi as an able stateman, capable of challenging the towering personality of Prime Minister Narendra Modi.
• The BJP led NDA had faced defeat in the recently concluded state elections of Rajasthan, Chhattisgarh and Madhya Pradesh, pointing towards a lack of mass acceptance of the BJP at the state level.

While many psephologists have expressed surprise about the NDA’s thumping victory, theories such as RSS (the ideological parent of the BJP) undoing the caste-politics in favour of NDA and the benefit of nationalistic fervour due to surgical strikes in Balakot, Pakistan and the pre-election skirmish with Islamabad have been proposed to explain NDA’s record victory.

The way forward

Over the last five years, the Indian economy has been slower than in the immediate prior periods. In addition, economic reforms have dented consumption. However, the strong majority won by Prime Minister Narendra Modi led NDA points towards the Indian voter willing to accept the steps taken by the previous government in the spirit of a necessary pain to clean the system. Noting that the NDA is likely to get a majority in the Rajya Sabha also, the government is likely to push through much needed reforms.

Despite the country benefitting from policy continuity, over the next few months, the Modi's government faces the challenges of balancing conflicting requirements:

• Without giving in to populist measures, provide sufficient impetus to re-invigorate domestic demand
• Maintaining domestic credit availability (especially in the aftermath of the IIFL crisis) in a volatile global macroeconomic environment
• Managing India’s crude oil bill in light of US sanctions on Iran, and India’s consequent withdrawal of dealing with Iran.

Most of these challenges are likely to present opportunities that enterprising entrepreneurs are likely to capitalise upon. The government’s role will be of paramount importance in facilitating such innovation, with the first focus on getting the basics around health, sanitation, food, infrastructure, education and capital availability right.

More from Anuj Dhawan: 

  • VMware: The proven extender of clouds, 25 March 2019
  • Atlassian and the risks of privacy, 21 Dec 2018
  • A case of what could have been for India's demonetization drive, 10 Sep 2018

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Anuj Dhawan

 

Most read