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Trade and geopolitics

Modi's troubled victory in India

Published 04 June 2024

Modi won a third term on the back of a campaign largely anchored on a rising, thriving India that is wielding economic power and influence globally. However, this focus on India's burnished credential abroad of the past five years has come at the expense of a hard look at how the domestic economy has fared since 2019, and what the government has in store policy-wise ahead.

Narendra Modi’s National Democratic Alliance (NDA) won a third term in the world’s largest elections which closed Saturday. The results bear a careful parsing of whether an ostensibly hegemonic Bhartiya Janta Party (BJP), which won by a smaller margin than it expected, has lived up to the electorate’s mandate.

The BJP’s campaign has largely been anchored on a rising, thriving India that has and is wielding economic power and influence globally. Modi and the BJP brass bet on their economic and diplomatic achievements since 2019 to make their case for another five-year term – leading the Group of 20, managing the Covid-19 crisis, deepening relations with the United States, navigating the potential fallout from the Ukraine war and Gaza crisis, and retaliating against China economically for border skirmishes.

However, this focus on the achievements abroad of the past five years has come at the expense of a hard look at how the domestic economy has fared since 2019 and what the government has in store policy-wise ahead. The 2024 results reveal a deeply divided electorate that’s less enamored by Modi’s achievements and more by pocketbook concerns.

Simply put, the Modi government is banking on its record of being and becoming a pivotal geoeconomic actor. The larger message throughout the campaign was that this has been a steady government that deftly managed global economic headwinds, exploited and mitigated the effects of ongoing global conflicts, used India’s economic heft to punish adversaries, and deployed India’s solid macroeconomic credentials and resulting market opportunities to establish new global strategic partnerships. It looks like this largely impressive record on the world stage will be eclipsed by more mundane, thorny domestic economic concerns like inflation and unemployment. Serious anxieties are palpable in India’s middle and lower-middle classes that have borne the brunt of recent economic setbacks and have expressed these concerns at the ballot. 

Before unpacking the current elections, let's take stock of the Indian economy over the last few years and its effects on Indian diplomacy. Until the 1980s, a collective preference for dirigiste policies meant that economic policy was divorced from foreign policy, a choice that walled India off from international trade. Market reforms in the 1980s and 1990s opened up sectors for international trade and competition. Since the 2000s, the expansion and success of the global services industry have turbocharged India’s economic growth. India has since emerged as a prime destination for major foreign firms to establish back-office consulting, R&D, and information technology (IT) services. Delhi has now invested billions in fabs to manufacture chips at home.

Reforms, however, remain sporadic, with successive governments refraining from overhauling existing controls though maintaining their progressive easing. India has intermittently raised tariffs and instituted arbitrary export restrictions on agricultural exports and import restrictions on laptops. Agriculture remains the top job provider, though its share of the Indian economic output has declined by value. India’s manufacturing sector remains underdeveloped given regulatory burdens that throttle production, relatively unskilled labor pool, and sustained competition from China and upstarts like Bangladesh and Vietnam. The structural impediments to a viable manufacturing industry, relative to manufacturing majors such as China has cost New Delhi a claim to translating global economic gains to the creation of domestic jobs. The Modi government has expanded and streamlined welfare and other direct sops including cash transfers, but the Indian economy still struggles to generate mass employment.

That said, what makes India economically attractive globally is the efforts since 2014 to transform the Indian economy’s institutional framework. In 2016, India modified its bankruptcy law to ease and quicken the dissolution of failed businesses. The government established a national sales tax in 2017 that harmonized state-level tax policies. Though state-owned enterprises (SOEs) remain a large fixture on the economy, the government has privatized uncompetitive SOEs. Production-linked Incentives (PLIs) have been introduced to boost domestic production and exports in sectors like food, pharmaceuticals, steel, textiles, telecom, electronics, solar panels, and batteries. Foreign direct investment has increased in certain strategic sectors like defense, insurance, and telecoms, though FDI plummeted last year which Delhi blamed on exogenous macroeconomic headwinds. The government has gradually established several foreign trade zones nationwide to stimulate exports. These changes have complemented and dramatically bolstered India’s physical and digital infrastructure to support public service delivery. 

This institutional progress has accelerated economic growth, barring the pandemic dip. In 2023, India became the world’s fifth-largest economy (US$3.4 trillion in nominal GDP) and the world’s most populous country. India’s gross domestic product grew by 9% in 2021, 7.5% in 2022, and 6.5% in 2023, supported by government spending on infrastructure, surging domestic demand, and increasing consumption. India’s services exports continue to thrive, reaching 12% of GDP in 2023 (US$345 billion), boosted by ‘global capability centres’ (GCCs) that deliver knowledge services to multinationals. Infrastructure-wise, India is teeming with new roads, airports, ports, highways, and energy capacity. The success of the indigenous digital payments ecosystem (Unified Payments Interface) has benefited the government and firms.

The surging economy has advanced geopolitical objectives and burnished Modi’s credentials as a competent international statesman running a leading economy. India’s response to Ukraine reveals this reality. India now ranks third in global oil consumption, importing 83% of its requirements. Sharply rising post-pandemic domestic demand meant Delhi had little choice but to purchase Russian oil. As the price of Russian oil dropped, New Delhi bought more and more, from 50,000 barrels per day in 2021 to 1.2 million barrels per day in December 2022. Through its calibrated and calculated response, India has also retained and increased its leverage over Russia by not joining Western sanctions, creating an opening to influence Moscow through sustained oil and defense purchases as it veers closer to Beijing in striking a global geostrategic balance.

For Delhi, protecting its relationship with Russia is paramount to managing China, its most acute and existential security challenge. Since 2017 and 2020, India has had relatively few direct options to deter Chinese military activities at their contested border. Short of meaningful options, India has progressively used economic coercion against China to express its displeasure and return some pain. Soon after the 2020 Galwan crisis, in which Chinese and Indian troops faced off over Indian road construction in the disputed valley, New Delhi banned nearly 60 Chinese mobile applications, including the two largest, TikTok and WeChat. Chinese FDI was frozen with arbitrary constraints placed on how and where Chinese firms operate. India forms a key part of US-led efforts to restrict Chinese access to critical and emerging technologies and diversify supply chains in the Indo-Pacific. Security cooperation aside, countries beyond Asia are banking on India’s rising economic stature and market opportunities to hedge against China.

China and Russia aside, a thriving economy has deepened India's strategic partnership with the United States. The motivations driving the US-India partnership are mutual, comprehensive, and long-standing and have resulted in a plethora of joint initiatives. The US has become strategically indispensable for India. India’s economic transformation hinges on accessing necessary US capital and technology to drive growth; this reality is supported and, to some extent, imperiled by the Biden administration’s economic policies. US-India trade (US$200 billion in 2022) and investment (US$52 billion in 2022) patterns remain solid, with considerable scope for growth. Yet, Washington’s focus on reviving and re-engineering the US economy through industrial policies could potentially deter capital and technology flows to India as it modernizes various sectors. India has to protect itself from economic policy trade-offs with the United States. Both countries have embedded investment and trade flows within strategic cooperation frameworks on defense (INDUS-X), technology (ICET), and clean energy (SCEP) to fuel growth and unlock existing and untapped opportunities.

So far, the Modi government has used various geoeconomic levers to manage relations with the United States, Russia, and China. New Delhi also deployed the G20 framework to highlight economic issues from the pandemic and the Ukraine war and generate global support for India’s development agenda. India’s 2023 G20 presidency highlighted issues like debt relief, climate change, digital public goods, and food security. World Bank estimates suggest that China is now the biggest lender to low and middle-income countries (LMICs), but Beijing’s disinclination to provide meaningful debt relief has given India a diplomatic opening to address difficulties across the Indo-Pacific, on which its development hinges. Nearly 60% of LMICs stood at the precipice of default in 2022. India used the G20 to not just highlight such lopsided debt burdens across the Global South but encourage other governments, including China, the United States, European Union, and multilateral development banks (MDBs) like the World Bank to offer more equitable debt-burden sharing provisions to ensure the current crisis does not engulf lower-income countries.

These efforts have rebounded to boost Prime Minister Modi’s personal popularity and standing as a leader, which the BJP heavily banked on to sweep these elections.

But is Modi’s popularity and credibility sufficient? That is the fundamental question of the 2024 election. India is better off than it was five years ago, but the livelihoods of Indians may not be. Per capita income (US$2,700) remains low by global standards; China’s stands at around US$13,000. The labor market remains structurally rigid and weak, with many Indians either unemployed or underemployed. Efforts to revive manufacturing through production-linked incentives have been seldom matched by robust factor market (land, labor, and capital) reforms that might be difficult to pass now with a less than robust majority FDI trends have fluctuated given global inflationary trends and capital flight to safety. So far, the Indian markets appear to have not factored this contested mandate well.

The Modi government has not prioritized or practiced effective federalism which is essential given how much authority Indian states have in shaping economic and social policy outcomes in areas like health and education. Opposition governments in various Indian states now blame the BJP for withholding federal money for infrastructure projects, obstructing the delivery of public services, setting arbitrary spending limits, and destabilizing domestic political dynamics. The BJP’s recalcitrance could be motivated by its desire to connect directly with Southern voters instead of working through opposition governments; this strategy has backfired with the BJP’s failure to win some seats in key southern states like Kerala and Tamil Nadu. With a stronger opposition in the parliament, the Modi government will likely face increased pressure for greater accountability and will have to prioritize effective federalism.

The 2024 Indian election results have somewhat answered the question of whether the Indian government's bleak track record on bettering the material realities of Indian citizens trumped its broader diplomatic achievements.

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Karthik Nachiappan is a Research Fellow at the Institute of South Asian Studies, National University of Singapore with a joint appointment at the NUS South Asian Studies Programme.

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