Modi’s downfall good news for India’s economy – Asia Times

The veneer of strongman invulnerability that covered India’s Narendra Modi for nearly a quarter of a century is crumbling around his Bharatiya Janata Party (BJP).

Markets are already expressing their disappointment that Modi’s party lost its majority in parliament, forcing the prime minister to rely on allies to form a government. A BJP coalition has secured enough seats to form a government – if it can hold things together.

Modi’s party did not get a majority of 272 seats on its own. The BJP-led National Democratic Alliance looks set to secure 293 seats. The opposition Indian Inclusive National Development Alliance could win 229 seats.

It’s something of a political “black swan” for a man who has dominated Indian politics since 2014. But also whose legend loomed large since the early 2000s, when he became chief minister of Gujarat.

The western state’s economic successes under Modi’s watch endow it with folk hero status that captivated the nation. Year after year from 2001 to 2014, Modi’s policies often generated faster gross domestic product, greater productivity and innovation, less bureaucracy and corruption, and better infrastructure than the national average.

In 2014, voters returned the BJP to power on the hope that Modi would implement the “Gujarat model” across Asia’s third-largest economy.

Clearly, the last decade did not go as many of India’s 1.4 billion people had hoped. Modi’s inability to win a majority of seats in parliament this time speaks to the widening gap between lofty rhetoric about economic reforms and implementation on the ground. Modi’s Gujarat model, it seems, is not as scalable as voters had hoped.

However, Modi’s electoral failure has a hard line: forcing Modi’s inner circle to focus less on his Hindu nationalist agenda and more on spreading the benefits of India’s 7% growth. The BJP is likely to move away from amending India’s secular constitution towards addressing growing inequality.

Modi, says economist Shilan Shah at Capital Economics, will begin the next term with a weakened mandate “that will make it more difficult to pass controversial economic reforms. But he will still be able to work as the head of a stable coalition.”

Shah added that “broader embrace across the political spectrum of the value of economic reform means the new government can still do enough to keep potential growth at 6%-7%. That would keep the economy on course to more than double in size over the next decade.”

In recent months, says Ian Bremmer, president of the Eurasia Group, longtime India watchers had noticed “few mentions in his campaign rhetoric of the Hindu-nationalist agenda that dominated much of his two terms.” end of Modi and with good reason. Modi has largely fulfilled his promises to ideologues.”

Bremmer adds that “now safely in power, Modi is looking to turn down the volume on cultural issues while pursuing economic development.”

However, not as certain as hoped, leaving Modinomics at a fork in the road. Thickening the plot are recent moves by China to overhaul its property sector, a pivot that could underline the BJP’s focus on economic restructuring.

In the run-up to elections that began in April, the China vs. India debate played out in the stock markets — with the edge often going to Mumbai. The nearly $7 trillion plunge in Chinese stocks from 2021 to early 2024 sent ripples down the street in the capital Mumbai.

China, however, has gotten back into the capital-raising game in recent weeks by telegraphing major moves to end the property crisis. In mid-May, Chinese leader Xi Jinping’s team detailed the new steps, including encouraging local authorities to buy unsold properties and reducing the amount home buyers need for a deposit.

It is the most persistent effort yet to tackle a crisis that has crept into Asia’s largest economy. And there is growing optimism that Xi and Premier Li Qiang are close to a political mix that will change China’s economic narrative for the better.

That complicates Modi’s calculus as his party plots its third-term agenda. For India, the idea of ​​a strong Chinese comeback is a double-edged sword.

The rise in Chinese demand is a clear plus for India’s manufacturing sector, which grew in importance on Modi’s watch. But China luring trillions of dollars worth of global investment, a good chunk of which has flowed into India Inc, would be a drag on Mumbai stocks.

“One of the arguments behind India’s rich valuations may have been political stability, the political security that a strong government provided,” analysts at UBS wrote. “Some of these assumptions may be called into question” given the outcome of the election.

Carlos Casanova, economist at Union Bancaire Privée, says investors have been buoyed by the ruling government’s market-friendly stock market reforms. They include its Make in India strategy that encourages companies to set up local factories and foreign investment to bet on local manufacturers.

“In addition, Modi has also released plans to make India a developed nation by 2047, which will require investment in infrastructure and growth of about 8% per year,” notes Casanova.

“Given the structure of Indian markets, we observe a strong correlation between GDP growth and [earnings per share] growth. High-quality earnings and high visibility could propel Indian stocks higher in the months ahead,” he adds.

UBS analyst Sunil Tirumalai notes that “since the BJP does not have a simple majority, bargaining power shifts materially within the alliance. Most scenarios from here could be taken negatively by the market compared to expectations last week.”

Goldman Sachs analysts add that “India must remain steadfast on structural reforms such as land and labor market reforms, creating an enabling environment for millions of workers to be gainfully employed, to realize its true growth potential .”

This could be the equivalent of Warren Buffett’s famous observation that “it’s only when the tide goes out that you find out who’s been swimming naked.” China garnering more and more global capital could expose the extent to which the Modi government has been weak, policy-wise, for some time.

“When I hear India being called the fastest growing economy in the world, I get very worried,” Princeton University economist Ashoka Mody, author of India is Broken.“, the Guardian reports. “These numbers aren’t worth the paper they’re written on.”

Modi is not alone in arguing that, beneath the surface, India’s supposed economic boom under Modi is not all it seems.

“All that glitters is not growth,” economists at Nomura Holdings wrote in a recent note. “Underlying growth is weaker than the headline suggests.”

The reason, Nomura thinks, is that India’s growth “is largely supported by strong growth in public capital, while private consumption and private capital remain subdued.”

India’s vital agricultural sector, meanwhile, is “underperforming”. To be fair, as Nomura points out, some industrial sectors are indeed “resilient”. Look no further than the fact that more than 7% of Apple Inc’s iPhone production is now done in India.

However, there are growing concerns that India’s 7-8% growth is not producing nearly as many new jobs as expected.

Arvind Subramanian, a former chief economic adviser in New Delhi, has warned that trends in GDP data are “absolutely mystifying” and “do not add up”.

Subramanian thinks the implied inflation figures given by the government are between 1% and 1.5%, but actual inflation is around 3% and 5%. Moreover, he says, “the economy is growing at 7.5% even though private consumption is at 3%.”

“So there are a lot of things about numbers that you know, I don’t understand,” says Subramanian. “I am not saying that these are wrong. This is for others to judge.”

India’s economic momentum is not a mirage, but it also doesn’t seem as efficient at sharing the fruits of rapid GDP as widely as Team Modi likes to argue. It echoes, in some ways, what happened to Modi’s party in 2004, when it lost power.

At the time, then Prime Minister Atal Bihari Vajpayee fought for re-election with a high-profile “India Shining” campaign highlighting the wave of optimism that supposedly swept the nation.

However, hundreds of millions of Indians who did not feel Vajpayee’s economic magic showed the BJP the door. Fast forward 20 years and the BJP seems to have reached another Wile E Coyote moment where the Indian masses realized that the road below was gone.

For Modi, this moment must really hit home. He made the choices mostly for her. Billboards covered the nation bearing his face and the words “Mod’s Guarantee” to convince voters that better days are ahead.

What Modi’s disappointing choices mean for Indian foreign policy is anyone’s guess. Few observers expect much change in Modi’s dual strategy of close ties with the US while also maintaining a leading role in the Global South, or the developing countries that make up the majority of the world’s population.

For Modinomics, however, this electoral reality check can refocus attention on much-needed steps to reduce red tape, attack corruption, increase productivity, increase investment in education and training, and rewrite laws regarding land, taxes and the legal system.

And to ensure that the huge economic lead that China has opened up over India’s economy will not widen further in Modi’s third term.

Follow William Pesek on X at @WilliamPesek