Modi’s Election Setback A Reality Check On India’s Economic Problems – Analysis

By Rojan Joshi

Narendra Modi’s disappointing electoral showing could be the catalyst that India needs for a shift away from divisive Hindu nationalism back towards the imperative of economic development.

Having set his sights on a supermajority of 370 seats, not even a historic third consecutive term could shake the feeling of disappointment for Modi. His Bharatiya Janata Party (BJP) stumbled to 240 seats, a 63-seat deficit from 2019, which means that Modi will have to rely on his alliance partners to form government for the first time since his election in 2014.

Coalition rule will require Modi to change his centralised, top-down approach to policymaking and adopt a more conciliatory tone in negotiating with his alliance partners, some of whom hold vastly different ideological views from the BJP.

Indian voters have sent a clear message that dealing with the problems of the economy matters more than divisive populist rhetoric.

In a country as diverse as India, a single unitary vision of Hindutva politics was never likely to have the appeal needed to deliver national success. The payoff from the BJP’s mixing of politics and religion seems largely to have been exhausted – exemplified dramatically by the government’s delivering on its promise of constructing the Ram Mandir Hindu temple in Ayodhya and then losing the constituency in which it was built. 

India’s big economic numbers undoubtedly look strong. It is the fastest growing major economy, expanding by 8.4 per cent in the last quarter of 2023, and boasts the world’s fifth-largest GDP. On the campaign trail, Prime Minister Modi promised to make India the world’s third-largest economy by the end of his third term in 2029. But this impressive scale is built on the aggregation of 1.4 billion people. On a per capita basis, the country remains desperately poor with an average income of about US$2,700. Progress has been made in poverty reduction, but credible estimates of how much are difficult given the lack of reliable statistical data.

Inequality between India’s rich and the rest of the population has grown worse in the past decade, due in part to the government’s favours to large domestic conglomerates and big business. The richest 1 per cent now hold 40 per cent of the country’s wealth, while the bottom 50 per cent hold just 6 per cent. There is no starker demonstration of this disparity than the country’s financial centre Mumbai, home both to Mukesh Ambani, Asia’s richest man, and Dharavi, the world’s third largest slum. 

The ability of opposition parties to tap into the discontent of voters who felt left behind by India’s two-track growth story was a significant factor in their success.

The question is whether the loss of the BJP’s sizeable majority will now cruel its ability to cut through with the politically difficult land, labour and agricultural reforms that are necessary for India to sustain and accelerate its economic growth. Political majorities in the previous two terms didn’t deliver those reforms.

Without his own parliamentary majority, Prime Minister Modi will be forced to negotiate with his coalition partners to take bills through parliament. Given that the Indian constitution splits legislative powers, including over land and labour laws, between the Union and the states, any step away from political centralisation and towards consensus augurs better for future reforms.

Modi’s vision is for India to become a developed economy by 2047, 100 years after independence. This vision implies a $35 trillion economy and per capita GDP of US$18,000. This ambition would require growth of about 10 per cent per annum for the next 23 years. The BJP’s approach has been to support high-tech services and capital-intensive big business as the drivers of economic growth. 

In most emerging countries, the economy shifts from being dominated by agriculture to manufacturing as unskilled labour is absorbed into more productive employment. There are some in India who think that it can leapfrog this manufacturing stage, with high-end services carrying the economy forward.

Yet the vast majority of Indians don’t have the skills for work in high tech or service industries. More than 45 per cent of India’s labour force is engaged in agriculture and the lack of decent jobs in the manufacturing sector has left them stuck at the bottom in low-productivity employment. Pervasive unemployment and the failure to deliver accessible manufacturing jobs, and the consequent growth in inequality, was the key economic issue that led to Modi’s electoral rebuke. 

Utilising its abundant labour endowment needs a paradigm shift in India’s development model. The political challenge for Modi is to build an economic agenda centred on the nation’s main resource: its abundant but on average low-skilled labour force, which is the source of its real comparative advantage for the next couple of decades at least.

India has the world’s largest population, 68 per cent of whom are between the ages of 15 and 64. Each month, 1 million Indians turn 18. This is a potential demographic dividend, but it could easily become a demographic disaster with jobless growth.

The government’s ‘Make in India’ initiative encourages domestic manufacturing and production, but under policies that favour ‘self-reliance’ in primarily capital-intensive goods. This inward-looking growth strategy and its protectionist tilt won’t absorb the country’s rapidly growing labour force in more productive employment. Tapping into foreign demand through an export-oriented approach offers opportunities for domestic firms. Protectionist policies sabotage India’s growing role in global value chains. For competitiveness in world markets, import barriers need to be low so that firms have access to cheap, high-quality inputs from abroad into production for export.

India’s economic agenda remains the same as it has been for the past decade. But after this election, it will be harder for the Modi government to ignore.

  • About the author: Rojan Joshi is a Researcher in the East Asian Bureau of Economic Research in the Crawford School of Public Policy at The Australian National University.
  • Source: This article was published by East Asia Forum