A weaker Modi means fewer reforms, slower economy – Asia Times

A weaker Modi means fewer reforms, slower economy - Asia Times

India’s 2024 general election was n’t the landslide victory for Prime Minister Narendra Modi and his Bharatiya Janata Party ( BJP) many had predicted. Quite the opposite, truly.

Since the BJP lost its majority in Parliament, Modi will now have to rely on two smaller parties, which both joined the BJP-led National Democratic Alliance ( NDA ) a few months before the elections. Significantly, the leaders of smaller parties are known to switch sides depending on which direction the social winds are blowing.

An NDA state will likely not run as smoothly as it did when the BJP commanded a parliamentary majority, even if the alliance is formed quickly and easily. This is mainly due to the election results’ generally negative reaction markets have experienced, but they have since recovered as a coalition government is formed.

However, many unanswered questions remain regarding the impact of a weaker BJP-led partnership on India’s and the world’s economy.

Reviewing the accomplishments and inadequacies of Modi’s ten- time career, two aspects stand out. First, India’s two Achilles feet, its twin physical and fiscal shortfalls, have been reduced.

India’s current account deficit decreased from an average of 3.5 % between 2010 and 2013 to just 1 % at this point, making it much less susceptible to external shocks like the Fed’s curving in 2013.

India’s endurance on the outside before, though, is not from stronger export but rather lower goods, notwithstanding booming local demand. Import substitution is a major cause of this because home goods are protected from foreign competition by great import tariffs and a growing business plan.

This resembles Latin America in the 1970s more than China, which gained entry into the WTO in 2001 and promoted foreign manufacturers ‘ technological advancement, more modern business methods, and a traditional economic boom.

Modi’s reluctant trade reform is one of the key reasons why foreign direct investment ( FDI) into India, especially in developing, is still underwhelming. It’s difficult to imagine a stronger push for business liberalization now that a weaker coalition government has emerged, especially given that protectionist trade unions and regional industrialists have more political options to play.

In light of this situation, and despite the political repercussions from a world that is “de-risking” China, India might not emerge as the FDI magnet that some analysts had predicted for Modi’s next term. &nbsp,

Next, on the macroeconomic front, Modi has significantly improved India’s placement, although the deficit remains big. His introduction of a goods and services tax ( GST ) was an important achievement, although much more needs to be done on direct taxation.

The majority of the tax-earnings have been used for public projects, including desperately needed system, in the past. However, with a weaker alliance government, Modi may have no choice but to redistribute more federal funding to welfare programs as a result of rising calls to target economic inequality.

However, this will undoubtedly be a problem in the future given the enormous amount of funding India will need to lower its system space and become more attractive to foreign investment, including manufacturing capability seeking to leave China.

In India’s populous country, it is crucial to build enough manufacturing jobs. The nation has done well in the ICT sector to time, but those positions only apply to the most highly skilled workers, leaving behind a much larger pool of poor workers.

There will be a lot of labor-intensive producing jobs needed to increase India’s average earnings over the next 20 years. It is uncertain whether a weaker Modi government will be able to implement the local measures that he needed to entice more foreign direct investment than he did during his first two administrations.

With all of these factors in mind, it seems safe to anticipate a slower reform plan and, as a result, a lower chance of development for India during Modi’s second term. There is still room for wish for a good financial narrative, given that foreign investors are interested in India as the only nation with the capacity to absorb their supply chains diversified from China. &nbsp,

Not only for its imports but also as an alternative to China’s FDI in manufacturing production, the EU in special needs a solid and opened Indian economy. India’s chances of reform have decreased following the election, but the EU and other countries may still be willing to strike a trade agreement with India in a time of increased global uncertainty and great strength contest.

Alicia Garca- Herrero is Bruegel’s senior research fellow and Natixis ‘ general analyst for Asia Pacific.