Modi 3.0: How different will be the third Modi government

Narendra Modi will take oath for the third time as the prime minister but in a significantly altered situation. Allies, including big regional parties such as the TDP and the JD(U), will prop up Modi 3.0. Many say they will extract their pound of flesh which might result in Modi’s agenda of economic growth suffering a drastic change or a slowdown. However, many others think there will not be any substantial change in the direction of Modi’s economic agenda as only bold reforms can take a backseat while all else continues as it is. Fitch Ratings on Wednesday reinforced its ‘positive’ outlook on India’s medium-term economic growth.

A populist budget?

The full Union Budget for 2024-25 is nearly a month ahead and it will reflect the new reality of Modi 3.0. Many economists expect the upcoming Budget to take a populist turn with a likely spurt in welfare and support schemes.

The Budget will indicate the policy priorities for the new coalition government and decide the growth trajectory for the next five years, Moody’s Analytics said.

“Every government focuses on welfare schemes, but the larger the coalition, the higher the focus on such schemes,” NR Bhanumurthy, economist and vice-chancellor of BR Ambedkar School of Economics University, Bengaluru, has told ET.
And that is not necessarily a good thing for the economy. “Freebies like free electricity and loan waivers should not take centre stage going forward as that will be detrimental to economic growth,” Bhanumurthy said.

Bhanumurthy said the new government is likely to focus on rural areas. Experts have been pointing to rural distress owing to high inflation over the past year and below normal monsoon last year impacting agricultural incomes.A Bernstein report sees an increased emphasis on direct social schemes to address voter concerns, especially in rural areas where the BJP experienced significant losses. However, Fitch Ratings expects that the recent losses of seats for BJP in Lok Sabha elections will not lead to substantial policy shifts. Instead, the forthcoming budget in July will likely provide concrete details on the government’s economic reform plans and fiscal goals for the next five years.

Policy and reforms

Ratings agencies have pointed to concerns regarding reforms and fiscal metrics. The rating unit of Moody’s has noted that a coalition government might delay economic and fiscal reforms, which could impede progress on fiscal consolidation. The government had targeted to reduce the fiscal deficit to 5.1% of GDP in the current fiscal compared with 5.6% in the previous year, with the goal to bring it down further to 4.5%.

Over the past 5-7 years, the government initiatives were aligned more with the supply side policies like corporate tax cuts, recapitalisation of banks, resolution of bad loans, and significant step-up towards infra spending, all with the hope of reviving private capex, Dhananjay Sinha, Co-Head of Equity & Research, Systematix Group, has written.

Now, with the dawning of the reality of a weaker mandate, we can expect a significant policy facelift encompassing a shift from an overly supply-side policy framework toward a broader demand revival, Sinha wrote.

Fitch Ratings has said coalition politics and a weakened mandate could make it challenging to pass legislation on ambitious reforms. “We believe major reforms to land and labour laws will remain on the new government’s agenda as it seeks to enhance India’s manufacturing sector, but these have long been contentious and the NDA’s weaker mandate will complicate their passage further. This could reduce the potential upside to India’s medium-term growth prospects,” Fitch said in a statement. The outcome should support broad policy continuity, with the government continuing to prioritise infrastructure capex, improvements to the business environment, and gradual fiscal consolidation, Fitch Ratings said.

Rajani Sinha, chief economist at CareEdge Ratings, said reforms would likely continue but “the focus will also move to areas that have been warranting attention, like job creation and equipping the young population adequately for getting absorbed in the workforce”. “The new government has to ensure that the benefit of high growth is passed on to the lower income category,” Sinha said.

Madan Sabnavis, chief economist at Bank of Baroda, said the economy “can accommodate any fiscal expenditure which is required due to political compulsions”. The interim budget has estimated total expenditure at ₹47.66 lakh crore for this fiscal year, up over 7% from the FY24 provisional estimate. “I don’t see any area of dissonance on most issues relating to industry and markets. However, issues like agriculture would need more deliberation with partners,” Sabnavis said.