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This fractured mandate for the Bharatiya Janata Party (BJP) marks a significant shift in India’s political dynamics and poses new challenges for the BJP’s policy agenda, according to analysts.
“There can be a possible shift in their policy stance, focusing more on welfare schemes, instead of development-oriented reforms,” an Aequitas report said.
While the BJP, led by Prime Minister Narendra Modi, may continue its focus on infrastructure and manufacturing, reports indicate a potential pivot towards welfare schemes.
Citi Research echoes this sentiment, noting that the fiscal deficit for FY25 could remain around 5.1 per cent of GDP, with increased spending on rural and welfare-focused schemes. Despite this, there is still an expectation of continued focus on infrastructure and manufacturing. “Broad agenda of infra+manufacturing+technology focus could continue, but contentious reforms could be delayed,” said Citi Research.
As per various reports, the coming months will be critical in determining how effectively the BJP can manage these dynamics and steer India’s economic and political trajectory. Interplay between maintaining coalition unity and pursuing its economic agenda will be crucial as BJP forms the government dependent on allies. The coalition dynamics introduce both opportunities and challenges, with the potential for significant policy shifts.
Market volatility and mixed prospects for key reforms like the Electricity Act and labor laws underscore the challenges of coalition governance. The reports suggest that if the assessment is that the lack of job opportunities was a deciding factor in the votes, then employment creation could move up in the economic agenda.
Coalition Dynamics: A New Political Reality
According to the Aequitas report, “This coalition won’t be so easy as these regional parties are not a natural, long-trusted ally of BJP and have a track record of switching sides in the past.” The BJP may have to offer key ministerial positions to maintain ally loyalty, and in a worst-case scenario, these allies could join forces with the opposition to form a new government.
Economic Implications and Market Reactions
The election outcome has injected volatility into the markets, with investors wary of the potential policy changes. Citi Research suggests that the markets will be keenly watching the government’s commitment to the fiscal glide path, especially with the upcoming July budget. “Rates market would focus on commitment to fiscal glide path, clarity to emerge in the July budget,” the report states.
Bernstein Group notes that while the BJP showcased a pro-growth, investment-focused manifesto, the coalition dynamics may necessitate policy tweaks. “The setback may, however, be enough to change the focus: push the Government to tweak some of its policies and increase spending towards direct social schemes,” Bernstein’s report elaborates. With capital expenditure likely to be driven more by the private sector as end markets are changing, the role of the Government will in any case moderate over time, limiting material risks to the cycle.
Reforms: A Mixed Outlook
Prime Minister Modi‘s ambitious reform agenda, including the new Electricity Act, labour laws, and farm laws, now seems unlikely to materialize fully. According to IIFL Securities, “Many of these now look out of reach, but simplifying duty structure/Goods and Services Tax (GST)/direct taxes, widening Direct Benefit Transfer (DBT), Free Trade Agreements (FTAs) are still possible.”
Despite the coalition constraints, there remains optimism about some reforms continuing. Bernstein’s report indicates a belief in the long-term strategy of boosting manufacturing and construction, though it acknowledges the perennial challenges in agriculture and structural reforms.
New Govt to Focus on Employment
According to a Citi Research report, if the assessment is that the lack of job opportunities was a deciding factor in the votes, then employment creation could move up in the economic agenda. This could be either through a renewed focus on skill development or channeling more credit to foster self-employment among the 250 million people who have been brought out of poverty in the last 10 years.
In summary, the BJP’s third term heralds a period of coalition governance, with potential shifts towards welfare policies and a cautious approach to reforms. The political and economic landscape will be closely monitored as the government navigates these new dynamics.
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