Will Indian elections usher in continuation of Modi reforms?

India’s prime minister, Narendra Modi, is looking to retain power with a fresh government mandate as the country launched its 2019 general election in April. As many as 900 million people across the country are eligible to cast their vote until May 19, with results announced on May 23. 

Mr Modi’s Bharatiya Janata Party (BJP) is clear favourite to win the most votes, but it is not expected to replicate its absolute majority of 2014, which paved the way for wide-ranging historical reforms. If opinion polls translate into concrete results, Mr Modi will have weaker reform momentum to deal with some of the economic issues in question in India, from unemployment to domestic manufacturing.  

Uncertainty reigns

“In 2014, Mr Modi’s government drew a lot of hype because it had an absolute majority and the BJP was also ruling over several key states,” says Marthe Hinojales, an analyst at risk consultancy firm Verisk Maplecroft. “A new coalition government with less reform momentum per se introduces a certain degree of uncertainty. Are we going to see an ambitious reform programme like the goods and services tax [GST] or the demonetisation programme? I wouldn’t bank on that so much; most likely there will be a lot of policy deadlock in parliament.”

Opinion polls in early April suggested the BJP will struggle to reach the 272 seats necessary for an absolute majority in parliament (it won 282 in 2014). The 272 mark might also be beyond the BJP-led National Democratic Alliance (NDA) coalition, as the opposition United Progressive Alliance (UPA) led by the Indian National Congress is bouncing back from the lows touched in 2014, when the UPA did not get more than 60 seats.

Mr Modi remains a favourite of the business community, however. His government launched major campaigns such as Make in India and Start-up India; liberalised the foreign investment sector by introducing an automated route for FDI projects in non-sensitive sectors; and pulled off reforms that would have otherwise been unfeasible without an absolute majority. These include the GST, which introduced a unified VAT regime for the whole country; the demonetisation programme to combat tax evasion and address the informal economy; and a new bankruptcy code.

As many as 60% of 95 Indian CEOs polled by national newspaper the Economic Times in early April rated NDA’s five-year government as good, with 71% expecting Mr Modi to return to power, although opinion is split over whether the NDA will have a majority or not.

A reform too far?

However, Mr Modi is paying the price for some of his radical reforms. The implementation of the GST and the demonetisation programme created discontent among SMEs and consumers alike, while the Make in India campaign struggled to deliver on its initial promises as the contribution of domestic manufacturing to the country’s GDP remains at just above 15%, against a pledge to reach 25% of GDP by 2025.

Besides this, he has struggled to deliver on promises to create millions of jobs every year and unemployment is now a key concern among the electorate. In a country of 1.3 billion people, half of them aged below 27, finding a job can still be very difficult even though the country's economy has been growing at an average rate of 7% per year over the past decade. The World Bank estimated in 2018 that India needs to create 8.1 million jobs a year to maintain its current employment rate. The country’s unemployment rate stood at 7.2% in February 2019, and it was even higher, at 13.2%, among graduates, testament to the fact that the Indian economy is struggling to create quality jobs.

 “After the elections, the attitude towards business and FDI will pretty much remain proactive... but [the politicians] will have to focus first on job generation, which is really the problem and this means boosting the domestic industry, as well as encouraging FDI to come in. Overall, the policy on FDI will still be maintained as [it is] highly proactive,” says Ms Hinojales.

FDI slows

FDI equity inflows into India have hit a downtrend despite optimistic statements to the contrary by the ruling NDA regime ahead of the elections. At the India Today Conclave 2019 in early March, Mr Modi said: “FDI is coming at the fastest pace into the country today.” Suresh Prabhu, union minister for commerce and industry and civil aviation, has an annual FDI target of $100bn. In fact, FDI equity inflows were down by 6.7% at $33.5bn in the first three quarters of financial year 2018/19 (from $35.9bn over the same period in 2017/18), according to the Department for Promotion of Industry and Internal Trade. 

This decline in equity inflows is closely related to a sharp reduction in greenfield FDI due to difficulties in doing business on the ground in India (especially in various states), regulatory uncertainty and land acquisition problems. Many big-ticket investment plans that were announced during the early years of the NDA regime in 2015 and 2016 did not materialise or were shelved. More than greenfield, it is M&A investments such as the $16bn takeover of Flipkart by Walmart and the announced merger of the Indian assets of Vodafone with the mobile business of Idea Cellular that represent the largest FDI numbers in the country in 2018/19.

Both of these foreign investors have raised concerns over the absence of a stable policy and regulatory framework in India, despite reiterating their commitment to the country. Walmart CEO Doug McMillon has expressed disappointment over the FDI policy guidelines in e-commerce that were changed as rules were tightened up in February 2019, while Vodafone head Nick Read has stressed the need for a level playing field, claiming regulatory outcomes over the past two years have ruled against every telecom operator except Reliance Jio, a leading domestic company.

All eyes on India

As the world’s biggest democracy heads to the polls, the domestic and foreign business communities are now holding their breath waiting for the result. The ambitious reform agenda of Mr Modi’s first mandate risks backfiring electorally as the BJP may fail to win a majority. However, Ms Hinojales says: “Expect future dividends from reforms. Once the adjustment period is over, it’s going to be more of smooth implementation and planning for businesses.” 

Whether or not this will give Mr Modi extra breathing space for new reforms remains to be seen.