ANALYSIS: India PM Modi tasked with reforms and stimulus after landslide election win
By Atul Ranjan
NEW DELHI, NNA – The comfortable majority won by India’s ruling coalition in the general election is likely to allow Prime Minister Narendra Modi to push ahead with structural reforms in his second term in office, but he may have to strike a delicate balance between forcing painful change and supporting economic growth, analysts said.
The Modi-led National Democratic Alliance (NDA) won 353 seats in the 542-seat lower house of parliament, securing an almost two-thirds majority and gaining 17 seats compared with the previous poll five years ago.
Modi’s Bharatiya Janata Party (BJP) won 303 seats, up from 282 previously and enough to form a government on its own as it cleared the 272-seat threshold for a simple majority.
During his first term, Modi conducted some economic reforms that made India a more attractive place for businesses to invest, while falling short on helping farmers and workers, according to some economists.
In 2016, he took the highest value bank notes out of circulation to crack down on “black money” and introduced an insolvency and bankruptcy code. The following year, the government replaced many federal and state taxes with a unified goods and services tax. Modi also worked to improve the electric power supply and traffic infrastructure, while trying to lower administration costs and fight corruption.
The result was an improved environment for investment in India. “Sustained business reforms over the past several years helped India jump 23 places to move to 77th position in this year’s global ease of Doing Business rankings,” the World Bank said in its 2018 report.
On the other hand, the Modi administration was slow to support farmers hit by drought. It also failed to complete sweeping land use and labor reforms, with only a limited impact on promoting the manufacturing sector for job creation, Makoto Saito, economist at NLI Research Institute, wrote in a report published after the latest vote was held.
“The landslide victory by the ruling alliance eased the concern in financial markets that the pace of policy reforms might slow down if it had to seek a coalition and the markets liked the fact the policy stance would continue,” Saito wrote.
“However, as the Modi government leaned toward populism ahead of the election, the pace of fiscal reform has become slower. It has set the current fiscal year’s target to trim the budget deficit to 3.4 percent of GDP, a setback by 0.3 percentage point,” he wrote.
The report noted the ruling party recovered from an earlier slip in voter support by bombing the Pakistani border and appealing to nationalist sentiment.
Crisil, a unit of Standard & Poor’s Financial Services LLC, said in a report that Modi’s landslide victory creates an opportunity for him to push tougher reforms on land and labor.
But some analysts see the need to support growth first as the Indian economy is in a cyclical downturn phase, with GDP expanding at around 6.5 percent, below the trend rate of 7 percent.
The new government needs to boost investment sentiment by stimulating domestic demand, D.K. Srivastava, chief policy advisor at EY India, a consultancy firm, said in a statement last week.
“On the monetary side, two successive policy rate reductions of 25 basis points each have not yielded tangible results as yet,” Srivastava said. “One more repo rate reduction of 25 basis points may be considered. This should be supplemented by a fiscal stimulus.”
Nomura Securities economists don’t see a major reversal of current weak economic conditions in the short term, while noting eased political uncertainty is a positive factor.
“We believe that, unlike the BJP’s first term, where prudence came at the cost of growth, the policy priority in the second term will be reigniting growth, with prudence as a secondary priority,” Nomura said in a report released last week.
“We expect a mix of rural reflationary policies (via fiscal support and productivity enhancement), infrastructure spending, tax simplification and social investment (housing for all). Reforms to the ease of doing business (judiciary) are also likely,” Nomura said.
The business community is pinning its hopes on Modi’s reform agenda.
Modi is expected to continue pursuing reform as Indian voters gave him a strong mandate, R.C. Bhargava, chairman of Maruti Suzuki India Ltd., a unit of Japan’s Suzuki Motor Corp., said.
Bhargava said Modi initiated many reforms but didn’t complete them in his first term as he failed to change people’s mindset and some politicians were opposed to the changes.
“The voter has now exhibited full confidence in what Mr. Modi was doing and has given him an overwhelming mandate to proceed further,” he said in a statement.
Previously, Modi’s “approach was very cautious and conservative in many respects,” Madhav Nalapat, professor of geopolitics at the Manipal Academy of Higher Education, told NNA. “But this time with the kind of mandate he has got, he will be involved personally to sort out some of the issues affecting demands including tax simplification.”