Event

Incumbent PM Modi has been re-elected for a five-year term after his BJP party won the general elections in April-May 2019. Official results showed a new spectacular electoral success for his party which even exceeded his already strong victory in 2014. The BJP kept its majority in lower house of Parliament with 303 seats (about 350 for its coalition) out of 543, thereby confirming its uncontested dominance of the political landscape as the Congress Party did in the past.

Impact

Modi’s victory was expected thanks to his strong and charismatic leader and businessman figure, but also as a result of a fragmented opposition without a clear leader at a national level as Congress Party’s Rahul Gandhi suffers from low popularity and regional parties have a more local appeal. Still, the magnitude of the BJP’s electoral victory surprised many and fundamentally lies in Modi’s high popularity. This is an impressive outcome after five years in power, especially considering his mixed first term. Under his rule, the business environment improved, a new bankruptcy code allowing swifter insolvency resolution was enforced, the long-awaited national goods and services tax was launched, FDI restrictions were eased in several sectors and state banks were partially recapitalised. However, he disappointed by controversial and chaotic measures (e.g. demonetisation plan) which harmed economic activity (not reflected in official data showing more than 7.5% average real GDP growth during his mandate), by a poor employment record – unemployment is at 6%, i.e. a 45-year high – and questionable reliability of revised economic data.

Modi’s second mandate will ensure continuity in priorities by focussing on economic growth, manufacturing (the ‘Make in India’ plan has been moving slowly until now) and economic modernisation. Progress in two essential reforms, namely concerning land acquisition and the rigid labour market, is unclear despite his party’s majority as they are likely to meet hard-fought opposition and remain controversial. Compared with his first term, Modi is expected to attach higher importance to national security. His change of political strategy followed the attack by Pakistani militants killing 40 men of Indian security forces in Kashmir which led to retaliatory missile strikes. Besides an increased conflict risk with Pakistan, an additional and worrying development comes from steadily rising Hindu nationalism, further raising tensions with all minorities, starting with Muslims, and eventually threatening India’s wavering multi-ethnic and secular state. In the medium to long term, climate change promises to be another increasing source of instability and conflict among India’s still predominantly rural population as stress on water and land will intensify under weaker monsoons, severe droughts and inevitable large migrations. An extra risk is the growing politicisation of the economy. During Modi’s first term, the central governor stepped down under political pressure whereas recently revised official statistics raised many doubts as they were more favourable and published by a political organ.

In the coming five years, the economy might benefit from Modi’s second term but structural weaknesses – including fragile state banks, corporate debt, poor public finances and insufficient domestic investments – and rising sources of instability will be major downside risks to the outlook.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com