Modi 3.0: Navigating Coalition Politics, Unemployment, and Inflation in India

Indian Prime Minister Narendra Modi has secured a rare third term in office which is a historic feat , yet his mandate is narrower than expected. This shift compels Modi to rely more heavily on his allies, necessitating urgent focus on critical issues such as unemployment, inflation, and economic disparities in the world’s most populous nation.

Coalition Dynamics: A New Era of Governance

Unlike the decisive victories in 2014 and 2019, the 2024 election results have left the BJP needing coalition partners to secure a majority in the 543-seat Lok Sabha. As per the Election Commission’s data, the National Democratic Alliance (NDA) has got 292 seats, a significant shortfall from the ambitious target of 400 seats. The BJP alone is leading in 240 seats, a steep decline from the 303 seats it held in 2019.

The BJP's reliance on allies to form the government is a significant shift at this stage, NDA allies will demand substantial concessions, influencing both policy directions and cabinet composition.

Modi, known for his assertive leadership, now faces the challenge of managing a coalition government. It will be intriguing to see how he handles the coalition dynamics.

Unemployment: A Pressing Crisis

Unemployment remains a formidable challenge for Modi 3.0. The Centre for Monitoring Indian Economy (CMIE) reported an increase in the unemployment rate to 8.1% in April 2024 from 7.4% in March, compared to around 6% pre-pandemic. Modi’s 2014 promise to generate 20 million jobs annually has not materialized, highlighting a critical gap in his administration’s performance.

Urban unemployment in the 15-29 age group surged to 17% in Q1 2024, up from 16.5% in the previous quarter. Despite India's GDP growth rate exceeding 8%, rural distress has intensified due to falling incomes and rising food prices.

According to the International Labour Organization (ILO), India needs to create at least 10 million jobs annually to keep up with its growing workforce. However, current job creation rates fall significantly short, exacerbating social and economic tensions.

Inflation: A Growing Concern

While headline inflation remains around 5%, food inflation has been consistently above 8% since November 2023, severely impacting the lower-income population. The prices of essential commodities like vegetables and cereals have seen double-digit increases over the past year, eroding purchasing power and increasing poverty levels.

Data from the Reserve Bank of India (RBI) indicates that food inflation contributes disproportionately to overall inflation, underscoring the need for targeted interventions in the agriculture sector.

Economic and Political Challenges Ahead

Modi's ambitious goal of transforming India into a developed nation by 2047 hinges on maintaining an 8%-plus GDP growth rate for the next quarter-century, mirroring China’s rapid expansion from the 1980s to 2010. However, the current political scenario complicates the path to sustained economic reforms.

The tight election outcome suggests potential difficulties in enacting critical reforms in agriculture, labor, and land acquisition—areas essential for fostering large-scale manufacturing and economic expansion. The fiscal policies pursued over the past decade, aimed at reducing deficits and boosting revenues, have supported significant infrastructure projects. However, with a slimmer majority, Modi may need to increase welfare spending, impacting fiscal discipline.

The Market Reaction

Investor sentiment, initially buoyed by expectations of a decisive BJP victory, has turned cautious. The Bombay Stock Exchange (BSE) Sensex and the Nifty 50 indices fell by over 2% as the election results revealed a narrower win. The Indian rupee also depreciated against the US dollar, reflecting market concerns over political stability and economic policy continuity. Things have stablished and the Sensex has hit all times highs on the back of a cautious ECB Rate cut.

Demographic Dividend or Disaster?

India's demographic profile, with half of its 1.4 billion population under 30, offers immense growth potential but also poses significant challenges. The CMIE estimates that the unemployment rate among 20-24-year-olds is a staggering 42.6%. Addressing this demographic challenge is crucial for Modi’s vision of India as a developed nation.

The necessity of structural reforms in land and labor markets and creating a conducive environment for employment. India needs steadfast reforms to realize its true growth potential.

Conclusion

As Modi embarks on his third term, he faces a complex landscape requiring adept coalition management and decisive action on unemployment and inflation. The path to making India a developed nation by 2047 is fraught with challenges, but with strategic policies and inclusive governance, it is achievable.

India’s future hinges on Modi’s ability to navigate these challenges and deliver on the promises of growth and development. The world watches as Modi 3.0 steps into uncharted territory, balancing coalition politics with the urgent need for economic reforms.