After the Upset: India’s Post-Election Business Landscape

It was a shock result – Indians went to the polls on June 1 and three days later, Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP) failed to secure an absolute majority. The landslide that nearly everyone – including exit polls – had predicted did not materialise.

As a result, the BJP found itself in an unfamiliar position, having to rely on its smaller political allies, including two prominent state-level parties in Andhra Pradesh and Bihar, to form a government. The BJP only secured 240 seats in India’s lower house, 63 short of its 2019 tally, and 32 short of the majority required to rule. Its coalition was able to put together 293 to secure the win.

For its political rivals, it was a surprise vindication. The Indian National Developmental Inclusive Alliance (INDIA) – a group of over 30 opposition parties led by the Indian National Congress (INC) – did better than expected, securing 234 seats in parliament.

The opposition claimed that it had been unfairly targeted by the authorities in the run-up to the election including having bank accounts frozen and senior leaders arrested on allegedly false charges. The results, they say, are a sign of its success despite this purported interference. Rahul Gandhi, the face of the INC and the leader of the opposition, recently described the election results as a “tectonic shift” in Indian politics that could lead to the downfall of Modi’s government.

With this new political equation, critics hope that Modi and the BJP’s more divisive and discriminatory policies will be tempered, including those targeting Muslims and other minorities. This hope stems from the fact that several of the BJP’s new coalition partners have support from Muslim voters and follow a secular ideology. 

But what does all this mean for business in India? We provide our analysis below.

Less Power, More Compromise

The BJP have been used to a commanding parliamentary majority for the last ten years, but now no longer. Modi’s government is reliant on its coalition partners and will need to get familiar with the concept of compromise in policymaking.

This is not typical of Modi’s modus operandi. He is known for preferring a centralised and autocratic style of leadership. One only has to look at his key decisions over the last decade, including a bold, unexpected move in 2016 to demonetise 86% of India’s currency notes in circulation in a stated effort to crack down on black money. The country was given just a few hours’ notice before demonetisation took effect, and the unilateral decision was made without legislative backing and without consulting state governments. Modi will now be forced to tone down his personalised style of leadership to accommodate the other voices in his alliance. It may be a tall order.      

The BJP’s reduced political clout will have an impact on India’s business environment and will make it harder for the government to push through business-friendly policies, such as simplified labour laws and reforms that make it easier for companies to acquire land.

And it’s worth noting that the BJP’s efforts at land reform have been thwarted in the past. In the mid-2010s the government tried to amend India’s Land Acquisition Act, only to backtrack following significant pressure from the opposition and farmers. Modi’s critics called the reversal a major political failure. The opposition will feel more empowered to fight against the BJP’s land and labour reform agendas now that they have made gains in parliament. 

This lack of land reform could make India a less attractive destination for foreign firms, such as those in the manufacturing sector who are increasingly keen to diversify their operations away from China. The weakening of the BJP could also have other business implications, such as a slowing of infrastructure spending, and a push back on the privatisation of state-owned entities.  

Prospects for Growth

India’s economy has witnessed impressive growth under Modi and the BJP, bolstered by an increased focus on infrastructure and the opening up of foreign direct investment in various sectors, among other factors. The country’s real GDP has grown by 6-9% in the post-pandemic era (2021-2023) and is projected to grow 6-7.2% in 2024-25. India currently has the fifth largest economy in the world, overtaking the UK in 2022.

Following the election results, there has been much speculation about whether a BJP-led coalition government can sustain the same level of growth witnessed since 2014, especially when facing high unemployment rates and inflation. While critics are sceptical, others have downplayed the risk, highlighting that past coalition governments have been just as effective at facilitating growth and implementing reforms. As a case in point, India witnessed an average GDP growth of 6.8% per year under an INC-led coalition government between 2004 and 2014. Analysts generally agree that investors should not be concerned and that India’s growth will continue under the current administration, especially given that it has become a national imperative and remains a core focus for Modi and the BJP.

The Future Outlook

The key event that investors should focus on is the upcoming budget presentation by Finance Minister Nirmala Sitharaman (expected in the second half of July, though the exact date has not been officially announced). This will provide clarity on the new government’s direction of policy and areas of focus. Infrastructure spending and incentives to increase manufacturing will likely be high on the list, as well as a focus on agriculture, defence, railways and renewable energy.

Modi has set ambitious green energy and sustainability targets for India. He can scarcely afford not to. At the COP26 summit in Glasgow, he pledged to make India carbon neutral – to cut its emissions to net zero – by 2070. He also announced that India will meet 50% of its energy requirements from renewable energy by 2030. The Modi government has implemented several policies to advance its green energy aims, including incentives to promote solar power, and these will continue. The effects of climate change are increasingly visible in India, the world’s third-largest energy consumer. During the election, the country experienced an extreme and prolonged heat wave with New Delhi registering record breaking temperatures with a staggering high of 52 degrees Celsius in May. This makes India’s energy transition and its journey to net zero imperative and unignorable.

Finally, the recent electoral events saw the stock of some of Modi’s business allies fall (this included the Adani Group, though its shares later rebounded). Perhaps more than ever it is important for investors to understand the political connections of their counterparties, as well as the reputational and regulatory implications. Our South Asia team supports clients with integrity due diligence, political risk, dispute resolution (including asset tracing), and human rights advisory. Please do get in touch to learn more.