For a decade Narendra Modi has driven India’s economy with brute force, making it the fastest growing among the major economies and well on its way to become the world’s third largest. This has happened on the back of reforms as well as policy dynamism. Make in India, Modi’s showpiece project, seemed out of reach when he launched it in 2014. Today, due to government active encouragement in the form of subsidies, tariffs and diplomacy, manufacturing has emerged as a big theme for the Indian economy. The Modi government has drawn praise from all around for its scorching pace of infrastructure growth. At the end of Modi’s decade of rule, India has high GDP growth, low inflation and a sure pathway to emerge as a global manufacturing power. However, the Lok Sabha elections results have cast a shadow on the future of the economy.
With the BJP falling short of absolute majority, it is taking support from two fickle allies, the TDP of Chandrababu Naidu and the JD(U) of Nitish Kumar, both of whom have had a love-hate relationship with the BJP. Both can have divergent economic and social agendas.
Many are being reminded of pre-2014 coalition politics notorious for corruption, inflation and policy paralysis. Then prime minister Manmohan Singh had commented that allies were making it difficult for him to run the government. But the Atal Bihari Vajpayee government before 2004, which too was a coalition, is known for bold decisions such as disinvestment. Will the Modi government, which has used robust policy intervention as a tool for economic growth, cave in to allies who will throw spanners into Modi’s agenda of bold reforms? Will the internal pulls and pushes of a coalition government lead to a policy paralysis?
What ET analysis shows
An ET analysis of the last three decades’ data shows that coalition governments have been as effective in pushing ahead India’s growth story as the regimes with one party having a majority of its own. But they have struggled to keep inflation in check.
The ET analysis indicates that while the BJP-led government achieved an average 7.4% annual growth in its first term between 2014 and 2019 – the fastest since 1989, when the coalition era started – growth rates under coalitions with no party in majority weren’t bad either. The average growth rate for the 10-year period for the BJP-led majority government was 6%, including the 5.8% contraction the economy witnessed in FY21 amid Covid-related disruptions.
The Congress-led United Progressive Alliance (UPA) government that preceded the BJP government in 2014 secured 6.7% growth in its five years, and 6.9% in the previous five years of its first term. The compound annual growth rate (CAGR) during the 10-year rule of the UPA at 6.8% was the fastest in India’s history.
Growth averaged 5.6% between 1991, when the Congress led by PV Narasimha Rao formed a minority coalition with Janata Dal, and 1999 when Vajpayee-led NDA returned to power for its full five-year term. Both Rao and Vajpayee are credited with unleashing next-generation reforms. In 1991, Rao, with Manmohan Singh as the finance minister, led the drive for India’s liberalisation and privatisation reforms, though it was more of a compulsion than choice at that time.On the other hand, such coalitions have faltered on inflation. Inflation for industrial workers, the only comparable metric that dates back to 30 years ago, was 5.4% during the Narendra Modi government’s two tenures, when the BJP had an absolute majority, but was 10.3% for UPA’s second stint and 6% in the first one. While it was low for Vajpayee’s years between 1999 and 2004, industrial worker inflation was 9.6% between 1991 and 1999.
Big, bold reforms are out?
The absence of a majority of its own for the BJP may weigh on the new government’s decisions on politically sensitive reforms, but less contentious reforms will continue, experts have told ET.
In the short-to-medium-term, the new government’s priority list may have to be tweaked, keeping in mind allies’ sensitivities, said some of them. For instance, job creation will grab the centre stage and some spending plans could be tinkered with to accommodate greater welfarism. Reforms in the factors market (land, labour and capital) or free trade agreements with other countries may take longer now, experts say.
However, sustained infrastructure push, including through elevated capital spending, and fiscal consolidation – the recurring features of the government’s budgets in the post-pandemic years – are unlikely to be reversed, as per experts.
Policy continuity is the way ahead
While big and bold reforms with severe political implications may be difficult, racing ahead on the track already established may not be a big challenge. The Modi government can manage to follow the roadmap it has already laid out for which it will be easier to achieve a political consensus with the allies. However, new reforms that seek to change the economy in radical ways such as of labour and land, will now be hugely difficult.
“I would say that policy continuity is guaranteed. The thing that is always difficult is making a U-turn or making a sharp left or sharp right. But merely continuing on the same path is not so difficult,” Swaminathan Aiyar, Consulting Editor, ET Now, has said in an interview.
“The BJP manifesto basically promised continuity. It did not have any fancy new schemes. It basically said we have done a fantastic job. All these things put together they have given you 8.2% growth. We have done a great job and we are going to continue doing more of the same. I mean, there can be more additional sectors or there can be slightly larger coverage of this or that scaling up, but the direction is going to be the same,” Aiyer said.
Even for full-majority Modi governments, trying to liberalise laws on land, labour and farm produce marketing and privatisation has been a bitter experience due to severe blowback as in case of farmer protests.
