Modi 3.0: Coalition Dynamics and Economic Agenda

Narendra Modi is set to take the oath as Prime Minister for the third time, backed by significant allies, including major regional parties like TDP and JD(U). This coalition support, while strengthening his position, comes with potential challenges. Observers predict these allies will demand significant concessions, possibly altering Modi’s economic strategy and slowing down his aggressive growth agenda.

However, many experts believe that the core direction of Modi’s economic policies will remain steady. While bold reforms might be temporarily shelved, the broader economic strategy is expected to continue. Fitch Ratings recently reaffirmed a positive outlook on India’s medium-term economic growth, suggesting that fundamental policies will stay intact.

With the Union Budget for 2024-25 on the horizon, economists anticipate a populist slant, with increased welfare and support schemes reflecting the coalition’s new reality. Moody’s Analytics highlights that the upcoming Budget will signal the policy priorities of Modi 3.0, setting the course for the next five years.

Concerns persist about potential delays in economic and fiscal reforms due to the coalition government. Moody’s rating unit has noted that such delays could hinder progress on fiscal consolidation. The government aims to reduce the fiscal deficit to 5.1% of GDP this fiscal year, down from 5.6% previously, with a target of 4.5% in the future.

Over the past 5-7 years, the government has focused on supply-side policies, including corporate tax cuts, bank recapitalization, resolving bad loans, and significantly increasing infrastructure spending. These initiatives aim to revive private capital expenditure. Dhananjay Sinha of Systematix Group notes that these policies are crucial for sustained economic growth.

As Modi embarks on his third term, the balance between coalition demands and economic reforms will be critical in shaping India’s growth trajectory.