2024-07-22 01:00:34
Indian Prime Minister Narendra Modi faces an early test of his third term as he prepares to unveil a budget that must balance the demands of new coalition partners while laying out an economic vision that boosts confidence after an unexpected electoral disappointment.
Modi’s Bharatiya Janata Party was historically re-elected to a third term in June but unexpectedly lost its parliamentary majority, forcing the prime minister to rely on two regional “kingmakers” to fend off a resurgent opposition.
India’s government is set to present its first budget on Tuesday, covering the fiscal year ending March 2025, and the two parties, the Telugu Samajwadi Party in southern Andhra Pradesh and the BJP (United) in northern Bihar, are demanding billions of dollars in financing for their respective states ahead of the government’s first budget.
TDP spokesman Neelayapalem Vijay Kumar said the party hoped to “use its influence as an alliance partner” to get funds for building roads, refineries and the new “high-tech” state capital of Amaravati.
Meanwhile, the JDU is demanding construction of an airport, a medical college and infrastructure projects, including power plants and new roads. Spokesperson Kishan Chand Tyagi said: “A new government has been formed and our party, the JDU, is a part of it. The expectations of the people of Bihar have risen.”
Nomura estimates that the alliance partners’ request could cost India about 0.2% of its GDP this year.
Modi is an imperious leader known for bold, unexpected statements who has never run a minority government. Investors are watching closely whether he can adapt to the compromises required by coalition politics while continuing to pursue fiscal consolidation and business-friendly reforms that he hopes will make India a global manufacturing and technology hub to compete with China.
“If Modi doesn’t push it hard, the economic transformation will not happen,” said one person close to the party. But they added that the BJP must “change its way of working, be a little more inclusive and make some allies in the process – I don’t know if that will be enough”.
Even as India’s economy grows by more than 6 percent a year, the prime minister faces anger over persistent poverty in rural areas and widespread unemployment among the country’s 1.4 billion people. Finding solutions to these problems, which many analysts blame for the BJP’s poor electoral performance, is crucial to bolstering his domestic standing and calming questions about how many more years he should stay in power.
Shumita Deveshwar, senior director of India research at GlobalData TS Lombard, said one of the government’s strengths is its ability to “present itself in a good light to investors”.
“But on the other hand, we saw from the election results that people are getting impatient and voters are waiting to see what the government will do next,” she said. “There are no quick fixes.”
The BJP, which in recent years has stepped up spending on infrastructure, welfare and subsidy schemes to attract foreign manufacturers, has dismissed concerns about its performance and appointed a largely unchanged cabinet last month.
This year, the Reserve Bank of India will set aside a record 2.1 trillion rupees ($25 billion) to support the new budget, part of its annual spending of surplus funds.
Analysts expect the extra money should help Modi’s government maintain or even reduce its fiscal deficit to 5.8% last fiscal year from the current target of 5.1%, even with increased spending on infrastructure or union states.
Narendra Taneja, a former spokesman for the ruling party, said the coalition partners were “completely aligned” with the BJP’s economic vision. “There will always be people who come up with wish lists… But are there serious differences? No. Is there animosity? No.”
Modi’s return was welcomed by big business, which has thrived on BJP policies such as corporate tax cuts. “They don’t fix what isn’t broken,” said R Shankar Raman, chief financial officer of Larsen & Toubro, India’s largest engineering and construction company, which has been in talks to restart development of Amaravati. “There’s merit in having continuity.”
But the BJP, entering its third term, also faces daunting economic challenges. Private investment has not picked up, and inequality has risen to historic levels under Modi, with the richest 1% of Indians holding 40% of the country’s wealth, according to a report this year by the World Inequality Lab. The Center for Monitoring Indian Economy estimated last year that youth unemployment was 45%.
Modi may not have enough time to show results. Two BJP-controlled states, the commercial hubs of Maharashtra and Haryana, are due to hold elections this year, and analysts expect them to be tough after the opposition made strong gains in parliamentary elections.
Pronab Sen, India’s former chief statistician, warned that favouritism towards Andhra Pradesh and Bihar in the budget would “raise thorny issues” and increase tensions with other states.
But he said India’s new political landscape could bring economic benefits if the BJP is good at building consensus, which would help it push for more economic reforms.
“For at least the last six or seven years, most of the decision-making has been completely unilateral,” he said. Now, “they have to convince their partners that [and] If they are wise, they will open up further to all states.”
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