How intact will be the India story under Modi 3.0? Here’s what we know

Four years after the shock of the Covid-19 pandemic, the economy seems to be in reasonably good shape. The gross domestic product (GDP) grew at 8.2% in financial year 2023–24 (FY24), which was the third straight year of more than 7% growth. Tax collections have been robust, and private investments too seem to be staging a revival. The Centre’s fiscal deficit was well controlled at 5.6% of the GDP in FY24, with indications that it could do better than the Interim Budget’s target of 5.1% in the current fiscal.

The results of the Lok Sabha elections show has put a coalition government under the BJP at the helm.

There will be at least some changes since the BJP will rely on allies such as the Telugu Desam Party and Janata Dal (United). This will mean that the government will have to hold fresh discussions on several pending reforms. Both the Nitish Kumar-led JD(U) and N. Chandrababu Naidu-led TDP are also hoping for special status for Bihar and Andhra Pradesh, respectively. A decision on this may be taken later and its impact on the fisc will have to be seen.

While it’s still early days, industry and investors have been hoping that several of these reforms would be taken up. These include the much-awaited Labour Codes that are yet to be notified despite being passed by Parliament in 2019 and 2020, as well as land reforms that could potentially ease land acquisition for setting up factories. Similarly, plans for strategic disinvestment of public sector units, some of which are underway, may also have to be reviewed.

Calls for lowering and rationalising rates of the goods and services tax (GST), an exercise that has been ongoing for a few years, could, to some extent, also depend on the new coalition dynamics. Unemployment and price rise, which were burning issues during the campaign, may now be taken up on a war footing.

Experts are confident that the mandate is one of continuity with change. The growth momentum would sustain, and major areas of policy focus such as investment-led growth, infrastructure development, boosting manufacturing, and energy transition would continue. Prime Minister Narendra Modi, in his address at the BJP headquarters after the results, also reaffirmed his commitment to reforms and growth while highlighting measures taken by his government in the past 10 years.

“If you look at the last 30 years, the data suggests that coalition governments are often better for the economy. I don’t think the Lok Sabha results should be negative news for the economy,” says N.R. Bhanumurthy, Vice Chancellor of Dr. B.R. Ambedkar School of Economics University, Bengaluru, underscoring that political stability is not in question.

Some contentious issues would remain, but they could not be addressed even with a majority government, he points out, noting that reforms such as those relating to land, labour, energy, and subsidies are still on the drawing board.

A coalition government could also lead to improved relations between the Centre and states, given the trust deficit in recent months.

Seshadri Sen, Head of Research and Strategist, and Madhavi Arora, Lead Economist, Emkay Global Financial Services, also believe that the focus on manufacturing will continue, especially given its importance in job creation. “There may be a subtle shift back towards consumption stimulus, but we think it would not be material. State budget deficits may worsen, but we see little risk in the consolidation of the central fiscal deficit. The capex cycle may also slow down as the government pivots (slightly) to revex (revenue expenditure) spending, and corporates may get into a wait-and-watch mode for a few quarters,” they said in a note.

But, in their view, factor market reforms like those of land, agriculture, and labour are now off the table. Privatisation and asset monetisation are also at risk.

The government and Cabinet formation over the next few days will provide more clues on how the new dispensation will take the economic agenda forward. The Union Budget 2024–25, likely to be presented in five to six weeks, will also provide clarity on the new government’s priorities.