- 2/3/2025

India: Impact of elections and current economic situation

2 min

The BJP has lost its absolute majority

On 7 June 2024, Narendra Modi took the oath of office as Prime Minister of India, marking the beginning of his third term at the head of the National Democratic Alliance (NDA) coalition. During the 2014 and 2019 elections, his Bharatiya Janata Party (BJP), which represents the bulk of the coalition, enjoyed an absolute majority each time. This is no longer the case. Although opinion polls had predicted a landslide victory, the BJP retained 240 of the 543 seats in the Lok Sabha (compared to 303 in 2019). However, the NDA coalition still holds a majority of 293 seats, down from 353 in 2019.

The BJP is now dependent on its allied parties within the NDA coalition to pass new laws, and this will be the case until 2029. For ten years, Prime Minister Narendra Modi ruled with an absolute majority of the BJP, but he was not able to sufficiently relax agricultural rules and liberalise agriculture due to internal and external resistance. The first Modi government (2014-2019) initially focused on the easiest goals to achieve: introducing a unified goods and services tax, defining an inflation target, and liberalising foreign direct investment. His second government was unable to pass almost any of the major reforms announced, such as agricultural reform and large-scale privatisations. What does the future hold?

Reaching a consensus remains a slow process

India's growth trajectory is unlikely to change much. GDP will continue to grow strongly in the coming years. In the past, successive governments, including those formed by a coalition, have broadly pursued the same economic policy. Reforms have always been implemented gradually and in stages, even when a particular party held a strong majority, as was the case during Modi's second term. India's political landscape, with its regional parties and local issues that vary from state to state, means that achieving consensus is a slow and difficult process.

In recent quarters - until September 2024, growth has been below expectations. Public investment in infrastructure, a key driver of growth in recent years, has not been as high as expected. Public spending has mainly taken the form of benefits. The loss of the absolute majority means that the ruling parties are now seeking to appease their voters with populist measures, such as cash transfers, gas subsidies, and free electricity. Domestic demand has been disappointing, especially in cities. Inflation is above the target range of 2-6%, due to persistently high food prices. This situation prevents the Indian central bank from cutting interest rates to stimulate the economy.

Deregulation and reforms are essential

The main objective – and challenge – of the new government remains to create jobs that require a large workforce in industry. These jobs must offer career prospects for the constant influx of new entrants into the labour market. It is also necessary to create new jobs for workers who want to leave the large agricultural sector. This shift towards industry, initiated long ago, is struggling to advance. During the fiscal year 2024, the sector accounted for 18% of total value added. A result comparable to the long-term average of 17% and well below the government's target of 25%.

India's economic trajectory remains promising compared to the rest of the world. But growth of around 6% is too low to generate sufficient jobs, demand, and income for the country's young and growing population. It will also not be enough to keep India from falling into the famous middle-income trap. After the disappointing second-quarter figures for FY 2025 (July-September), Anantha Nageswaran, economic adviser to the Prime Minister, highlighted the need to strengthen deregulation and implement more structural reforms to boost growth. Everyone knows what needs to be done. But as in any democracy, there is always the fear of not being re-elected.