The government’s priorities will shift, and policymaking will become more complex
After multiple rounds of voting stretching across several weeks, India’s national election yielded a surprising outcome that veered sharply from most pre-election polls and exit polls. The Bharatiya Janata Party (BJP) lost its absolute majority in India’s lower house of Parliament, the Lok Sabha. It took only 240 seats, down substantially from the 303 it won in 2019, and well short of the 272 needed to govern. As a result, the BJP now requires the support of coalition partners, who won another 53 seats, to pass legislation. At a minimum, it needs support from three additional parties in its alliance. If it loses support from the second or third largest parties in its coalition, this figure rises to at least six. This governance structure, whereby at least four parties need to align to pass legislation, represents a substantial break with the last 10 years, in which the BJP was able to develop and pass policies on its own.
Business Implications
India’s election results are likely to raise questions in many multinationals’ headquarters about the country’s trajectory. After a decade of more predictable one-party rule, corporate centers may have concerns about what coalition rule will mean for India’s governance and reform agenda. APAC VPs and India GMs should actively manage these concerns. While the election results are likely to make the business environment more challenging and weigh on growth, India will continue offering multinationals substantive opportunities, particularly relative to many other large markets globally.
In general terms, multinationals should prepare for national policy to take a more populist turn. Practically speaking, this means the government will spend more on social programs and support for lower-income households. Companies should also prepare for the INR to continue depreciating in the years ahead as increased government spending is reflected in India’s fiscal deficits.
B2C companies should expect more direct support for lower-income households to boost demand at the bottom of the pyramid, while lower overall growth tempers upper-income households’ wealth generation. This dynamic is likely to last multiple years, so companies should take it into consideration when developing their strategic plans for the years ahead.
B2B companies should expect the government to reduce its focus to some degree on infrastructure development. While it will remain a priority for the Modi administration, companies are likely to see spending growth slow and pricing pressures rise. Additionally, companies should expect to see less generous funding for production-linked incentive programs moving forward.
Medtech and pharma companies should expect Indian leaders to increase focus on grassroots healthcare provision. Government spending is likely to flow toward underserved (e.g., rural) areas, and public players will be even more aggressive in negotiating prices. Growth in out-of-pocket spending will remain strong; however, reduced growth in the overall economy will slow it to some degree.
Election Impacts on India’s Outlook
India’s election outcome was almost certainly driven by multiple factors (e.g., anti-incumbency, discomfort with religion as a wedge issue, the BJP’s aggressive pursuit of political rivals, concerns about constitutional changes). However, economic issues for large portions of the population likely played an outsize role. India’s rapid growth in recent years has not led to substantial job creation, and gains have skewed toward urban areas and business owners. Many low-income workers are still employed through the informal sector and face substantive challenges from heightened inflation, particularly for food.
The BJP will course correct after taking stock of the election results, and these economic considerations will likely inform its policies. The Modi administration will focus less on elevating India’s standing on the global stage and more on addressing domestic issues. It will likely shift attention away from priorities like infrastructure development and toward priorities like social welfare, healthcare, education, and job creation. However, the BJP is unlikely to give up on its previous goals entirely, leading it to accept higher fiscal deficits in the coming years to achieve them.
This will not be the only factor driving up India’s fiscal deficits. The BJP must bring coalition partners on board to pass legislation, so it will have to accommodate their priorities and demands, putting additional upward pressure on government expenditures. Without a concomitant increase in revenues, which seems unlikely at this point, this will increase India’s fiscal deficits and put additional depreciatory pressure on the INR.
The BJP’s need to rule via coalition will have effects that reach far beyond fiscal deficits. Its two main partners, Telugu Desam and Janata Dal (United), are regional parties that are not reliable members of its coalition. (Indeed, they have switched sides multiple times in the past and only rejoined its alliance in the months leading up to the election.) The BJP does not have enough votes to pass legislation without at least one on its side, and it will be difficult to pass policies without both, so they are likely to extract substantial concessions for continued support. The same goes for many of the smaller parties, whose support will be required if one of the larger parties abstains.
The bottom line is that policymaking at the national level is set to become less efficient, less predictable, and more beholden to a wide range of interests than it was before. This will likely lead to a diminished outlook for national-level reform and lower overall growth. Thus, while India will continue to be an outperformer on the global stage and offer substantial opportunities for multinationals, executives will need to adjust expectations for India’s business environment that were set before the election.
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