Disappointment Already Evident

A multi-stage federal election was held in April–May 2014, and it was widely assumed that the main opposition BJP would emerge in a strong position to pull together a coalition government. However, boosted by strong support for its prime ministerial candidate, Nahendra Modi, the popular (and controversial) former chief minister of the state of Gujarat, the BJP not only won the election, but secured an outright majority of seats in the Lok Sabha. Adding in the seats won by the BJP’s allies in the NDA, Modi took office in June boasting the backing of a three-fifths majority in the Lok Sabha, and the strongest mandate of any incoming prime minister since the 1980s.

Modi’s pledge to apply the business-friendly model he implemented with much success in Gujarat at the national level resonated with voters troubled by the deceleration of economic growth in recent years. There was always a risk that Modi might fall victim to unrealistic expectations, but it was reasonable to assume he would be given some time to settle into the job. However, barely more than two months into the prime minister’s five-year term, a deepening sense of disappointment is already apparent, particularly among members of the business community, many of whom are openly questioning whether they overestimated Modi’s reform zeal, with some even speaking of missed opportunities.

The prime minister’s caution may have more to do with pragmatism than a lack of will. The NDA controls less than one-quarter of the seats in the upper house of Parliament, the Rajya Sabha, whose members are chosen by the state legislatures, and the opposition has already blocked a measure to increase the maximum foreign ownership in insurance companies from 26% to 49%. The prime minister may have decided that his best strategy is to focus on the low-hanging fruit early in his term, thereby building a record of achievement that sustains support for his reform agenda while he waits for future state elections to produce a more compliant Rajya Sabha. It is a defensible approach, but it carries a risk that unmet expectations will sour voters on the BJP and its allies, preventing the government from clearing the legislative obstacles.

Unfortunately for the prime minister, he will not be able to count on a robust economic performance to bolster his popular support in the near term. Real GDP growth ticked up to 4.6% in the fiscal year that ended on March 31, barely better than the 4.5% pace of expansion in 2012/2013, and the latest output figures provide little in the way of evidence that suggests the economy is poised for a strong rebound.

An escalating sanctions war between Russia and the EU threatens to stall an already anemic European recovery, with negative implications for India’s export sector, and a political crisis in Iraq, where jihadist militants have gained control of large sections of the north of the country and the fragmented political leadership in Baghdad is failing to rise to the challenge, has threatened the flow of oil from one of India’s most important suppliers, creating the potential for shortages and/or a sharp hike in the government’s bill for fuel subsidies. Meanwhile, the agricultural sector is bracing for a drier than normal monsoon season that figures to negatively affect farm output.

Forecast Summary

SUMMARY OF 18-MONTH FORECAST

REGIMES & PROBABILITIES BJP Majority
75%
Divided Government 20% UPA Minority
5%
RISK FACTORS CURRENT  
Turmoil High SLIGHTLY LESS Same Same
Investment
Equity Moderate SLIGHTLY LESS Same Same
Operations High SLIGHTLY LESS SLIGHTLY MORE Same
Taxation Moderate Same Same Same
Repatriation Moderate Same Same Same
Exchange Low Same SLIGHTLY MORE SLIGHTLY MORE
Trade
Tariffs High SLIGHTLY LESS Same Same
Other Barriers High Same Same Same
Payment Delays Moderate Same SLIGHTLY MORE SLIGHTLY MORE
Economic Policy
Expansion Very High Same SLIGHTLY MORE Same
Labor Costs Low SLIGHTLY MORE SLIGHTLY MORE SLIGHTLY MORE
Foreign Debt Low SLIGHTLY MORE SLIGHTLY MORE SLIGHTLY MORE

SUMMARY OF FIVE-YEAR FORECAST

REGIMES & PROBABILITIES BJP Majority
65%
Divided Government 20% UPA Minority
15%
RISK FACTORS BASE  
Turmoil Moderate Same SLIGHTLY MORE SLIGHTLY MORE
Restrictions
   Investment Moderate SLIGHTLY LESS Same Same
   Trade Moderate SLIGHTLY LESS Same SLIGHTLY LESS
Economic Problems
   Domestic High Same SLIGHTLY MORE SLIGHTLY MORE
   International High SLIGHTLY LESS Same Same
   * When present, indicates forecast of a new regime

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