India election: Can Modi carry out tough economic reforms?

The results of India's six-week-long national election, the world's largest, started trickling in on Tuesday, showing that Prime Minister Narendra Modi's Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) was on track to secure a third term, but with a reduced parliamentary majority.    

With vote counting nearing its end, the NDA was ahead in about 290 of the 543 seats in the Lok Sabha, the lower house of India's parliament, contrary to exit poll predictions of a landslide win.

The BJP was also short of a majority of its own. This means the party will likely be forced to rely on coalition partners to remain in power, unlike during its past two terms. 

This could introduce some uncertainty into policy and governance.

After the early vote-counting trends were out, India's benchmark indices — the NIFTY 50 and the BSE Sensex — dove by more than 8%, before recovering slightly.

It marked the biggest fall since March 2020 and pulled stocks sharply away from record highs hit a day earlier.

India eying to become a global manufacturing hub

Businesses and investors expect the new Modi administration to ensure political stability and policy continuity in the world's most populous country, which is also the fastest-growing major economy globally.

India's economic output grew 8.2% in the year to March, the highest among large global economies, supported by robust demand and government infrastructure spending.

That has kept sentiment positive about overall economic trajectory despite challenges such as chronic youth unemployment in a country that has a large young populace, with 65% of Indians estimated to be under 35-years-old.

To boost growth and create jobs for the millions of people entering the labor market every year, Modi's government has aimed to transform India into a global manufacturing hub.

Over the past five years, New Delhi has lured foreign tech giants like Apple to set up production units in the South Asian nation, at a time when many multinational companies are looking to diversify their supply chains beyond China due to growing geopolitical tensions between Beijing and the West.

"India is rightly being looked at as the leading contender for China+1 strategy," said Amit Kumar, a researcher at the Takshashila Institution in Bengaluru.

"India faces competition from the likes of Vietnam, Thailand, Malaysia and ASEAN as a whole. Mexico too is a competitor. But given geopolitics is the reason driving de-risking and diversification away from China, India is a much safer bet than the others," he told DW, citing India's growing geopolitical clout and massive consumer market.

Modi's mixed success?

Over the past decade, Modi's government has pumped huge amounts of money into improving India's physical infrastructure, including, roads, railways and ports.

There have also been efforts to attract foreign investment and boost the production of items such as high-end electronics.

"As a neutral democracy with one of the world's largest and fastest-growing consumer markets, India has become increasingly attractive as a hub for foreign direct investment from multinationals across the US, EU, Asia and the Middle East," Rajiv Biswas, an international economist who's also the author of "Asian Megatrends," told DW.

"India's growing attractiveness for foreign multinationals has resulted in the doubling of FDI inflows over the past decade, with India's cumulative FDI rising to around $600 billion (€552 billion) during 2014-2023," he said.

Shilan Shah, deputy chief emerging markets economist at Capital Economics, said in a recent note that India has made progress in raising its share of global high-end electronics exports.

"But it has failed to capture any additional market share in the lower-end manufactured goods, which are typically more labor-intensive."

He noted that part of the problem is that Chinese firms have become more productive by making these goods more capital-intensive. "This has made it harder for Indian firms to compete," he said, adding that this highlights the need for the next Modi government to step up the pace of structural reform.

What about bureaucratic hurdles?

India has a large supply of labor and wages for manufacturing workers are generally lower there than in China.

But the advantages of lower wages are often offset by problems surrounding productivity, logistical efficiency as well as regulatory and business conditions, Pravin Krishna, professor of International Economics and Business at Johns Hopkins University, told DW.

"Ironically, India has been unable to attract investment in areas that exploit India's abundance of labor and generate manufacturing employment growth. While China seems to be vacating the labor-intensive textiles and apparel sector, India's global gains have been minimal," he said.

Kumar, the Takshashila researcher specializing in the Chinese economy and India-China ties, said setting up businesses in India is still "cumbersome compared to China or its competitors vying for the China+1 spot."

He pointed out that the various bureaucratic approvals required involving land, labor, electricity and water, among other things, take a long time.

"Government involvement in high-profile projects has led to the speedy processing of applications but those were exceptions. All foreign firms wanting to invest in India might not have the desired political or government backing."

What happens to business-friendly reforms?

There were hopes that Modi, in his third term, would push through tough, business-friendly reforms to transform India into a global manufacturing hub.

But with the BJP not winning a majority of its own, it would need the support of other parties to introduce reform measures. 

Getting foreign businesses to invest and set up factories comprises the bulk of the Modi government's strategy so far to develop India into a major player in manufacturing, said Kumar.

"But there's also this tendency towards autarky at times compounded by powerful lobbying by domestic players against opening up," he stressed.

"A bulk of domestic players are just not competitive and competent enough. And supporting them through protectionist policies will come at a great cost without any guarantee that they will develop into globally competitive players," he added.

Experts say a high priority for the Indian government over the next five years in order to boost the nation's manufacturing competitiveness will be to improve the quality of infrastructure further.

New Delhi should also accelerate digital transformation by promoting the integration of industrial automation and generative AI into Indian manufacturing processes, Biswas said.

"One of the key challenges India faces in relation to being part of global manufacturing supply chains is that it is not a member of the Asia-Pacific's two largest regional trade blocs, the RCEP and the CPTPP," underlined the economist, urging New Delhi to accelerate bilateral FTA negotiations with large advanced economies, to further reduce tariff and non-tariff trade barriers.

Edited by: Ashutosh Pandey