This year, Indian Prime Minister Modi won a landslide victory in the Indian elections, providing him and his Bharatiya Janata Party (BJP) with a large majority in Indian politics. Although this was initially conceived of as a market-positive outcome, problems have started to accumulate in India’s economy. As such, Modi has some tough challenges to overcome in his second term if he is to sustain the Modi Wave that characterized his political ascent.


Our observations

  • Growth in India slowed down to 4.5% in the July to September quarter, and fell for six consecutive quarters from around 8% in the first half of 2018. As a result, India has now again lost its title of fastest growing large emerging market to China. This is also a severe blow to Modi’s goal of making India a $5 trillion economy by 2025, hoping to overtake Japan as third largest economy behind the U.S. and China.
  • As India has insufficient labor-intensive industrial production, its unemployment rate was relatively high at 8.5% in October, a 3-year high (although leaked government documents put it at a 45-year high). India has severe difficulty creating enough jobs for the 12 million Indians that are yearly entering its labor market. This also makes India’s economy less exposed to the external environment, although a decline in manufacturing accounts for most of the current slowdown (especially car sales declined, by almost 25% in September).
  • Modi support is concentrated in the “Hindu Belt” across the Indo-Gangetic plains, whereas his support is much weaker in the Indian South. However, the south is the most vibrant part of India, with GDP per capita and socio-economic indicators (e.g. fertility rates, literacy rates) at middle-income levels (while northern India is comparable to African countries in those respects). We’ve called this the “two tales of India”. South India is most important to India’s economy, as it is where India’s IT sector and large trading hubs (e.g. Chennai, Mumbai, Hyderabad, Bangalore) are located, whereas the political and cultural center is located in the northern parts of India. This could lead to a deepening divide and diverging interests of both Indias.
  • India’s CPI is increasing because of supply-side disruptions in onions, which have caused political fallout before, as onions are a core ingredient in Indian cuisine. That puts the Reserve Bank of India in a bind between slowing growth and rising inflation. In response to a slowing economy, the new head of the RBI has used the monetary policy space to support growth and has cut its main policy rate by 135 basis points to 5.15% since December 2018 (although it upheld the benchmark repo rate of 5.15% in its latest December 2019 meeting). India’s government has been under pressure to increase fiscal spending after a $20 billion corporate tax cut in September this year, but has little room to maneuver as it is reaching its target of a fiscal deficit of 3.3% of GDP. As a result of these problems, Moody’s has downgraded India’s credit rating to negative (although S&P kept India’s rating at “stable” last week).
  • India’s economic problems are partly caused by troubles in India’s shadow-banking sector, beginning with last year’s collapse of major lender IL&FS , which had been part of an easy credit cycle that facilitated a consumer spending boom in previous years. Now, as credit (credit to the commercial sector has dropped 88% this year) has dried up, private consumer demand and business investments have slumped.
  • Last month, Delhi declared an “air pollution emergency” after pollution had spiked to “severe plus” levels, closing schools, stopping reconstruction and shutting down coal and other fuel-based factories. Two years ago, a Sri Lankan cricket player vomited on the pitch after playing in the heavily polluted Delhi air. India’s air pollution is far worse than China’s has ever been, and 15 of the 20 most polluted citiesare in India (Delhi ranks 11th). India also ranks 177th of the environmental performance index, of 180 countries. In response, India is betting big on renewable energy. It set up a “national solar power mission” in 2010 and launched the International Solar Alliance in 2015 to mobilize about $1 trillion in solar power investments around the world, focusing mostly on tropical countries that are “sun-rich but cash-poor”. India wants to accelerate its efforts due to the falling prices of solar panels, and hopes to generate about 100 GW solar energy by 2022.


Connecting the dots

In May 2019, Modi and his BJP won a landslide victory in the Indian general elections. When he rose to power in 2014, with a pledge of radical reform and taking on corruption, after decades of Congress-led governments, his governments implemented some important reforms. The most important were a long-awaited tax reform in 2017, a demonetization move in December 2016, and a new bankruptcy code to speed up the process of “creative destruction” in April 2018. As a result, India jumped from place 130 to 63 on the World Bank’s Ease of Doing Business Index and receiving record amounts of foreign direct investments during his first tenure. However, the balance of his first term became more controversial towards the end, as Modi increasingly brought his hardline Hindutva rhetoric to the fore while economic problems began to accumulate. Furthermore, as Modi has positioned a considerable number of allies in India’s most powerful institutions, such as ministries, judicial courts and local governments, and used many “grass-root cadres” to support his messages throughout India, this led to increased polarization of India’s society and population during Modi’s first term.

Since the sweeping economic reforms in the 1990s, India’s economic growth has accelerated but inequality increased as well. Furthermore, given that India is still a highly traditional society, scoring low on many socio-economic indicators and having low urbanization levels and a large rural agricultural economy, this has led to a divergence between opportunities and aspirations of India’s poor. This makes India a prime example in which the process of modernization does not linearly leads to more progressive values and democratization. This is reflected in Modi’s popular Hindutva ideology (i.e. the belief that India is the homeland of Hindus) and more than half of Indians now favoring autocratic leadership and even military rule. It shows that Modi’s campaign was able to tap into deep resentments in India’s society, both in 2014 and 2019, and his support cut through caste and ethnic boundaries across India’s diverse society, a long-term goal of Hindu nationalists. After the beginning of his second term, his administration began an ethnic and nationalist campaign consisting of measures such as stripping almost 2 million minorities of their citizenship in Assam, building a Hindu temple on a demolished mosque site, building detention camps for Muslims in India’s Eastern provinces and stripping Muslim-majority Kashmir of its autonomy. Playing this card paid off, as he campaigned with hardline rhetoric against Pakistan and other minorities in India. This fuels fears that his administration will prioritize cultural issues over economic reforms.

A possible bright side to Modi’s first term was his push for the emergence of an India Stack”. Founded on India’s Aadhaar (biometric identification) system, this has provided huge leapfrog potential for India. Since its introduction, coupled with other government plans to increase (digital) financial inclusion, it has caused India’s lower-middle income classes to see rapidly expanding possibilities brought by digital technologies (India now has the third-most unicorns in the world, and its fintech and gig economy is booming).

Nonetheless, India has important structural development objectives which cannot be easily attained by digitization, such as a low urbanization rate, weak manufacturing industry, low productivity (driven by bad education and healthcare), high levels of pollution, rampant inequality, corruption and bad governance (i.e. crony capitalism, and what is often called the “Raj system”, referring to the colonial rule of the British overSouth Asia). In our view, these are development priorities when it comes to increasing India’s long-term growth and structural projections. On the other hand, India’s structural, long-term outlook is favorable given its strong positioning in digital technology, favorable demographics (it will be the most populous country by 2027), high savings rate to boost domestic investments, a dynamic startup culture that could benefit from reallocation of global supply chains due to the U.S.-China trade war, and being a favorable geopolitical ally to many affluent powers (e.g. Japan, the U.S., Russia). India being a favorable geopolitical stems from its tradition of non-alignment; that it adopted during the Cold War, India led developing countries that neither sided with the Soviet Union nor the U.S. As a result, India has few enemies (besides Pakistan, and arguably China, which seeks similar spheres of influence), but also few strong allies (India has joined several initiatives of the U.S. but is dependenton Russian military imports). And it only opened and liberalized its economy and shed its focus on autarky as recently as 1991.

In all these cases, reforms could be pursued by Modi’s government. However, as state governments have the most political power in India’s political system, large-scale projects are hard to implement through the central government. However, Modi’s increased majority in the Lok Sabha (the lower House of India’s bicameral Parliament) and the New Democratic Alliance (the BJP right-wing coalition controlling many states in India) could make it easier to carry out reforms in the coming years, meaning that India could follow up on its prospect of becoming the new leader of global economic growth. The current economic downturn and pending crisis could become another critical juncture like India’s financial crisis in 1991 that led to India’s liberalization and opening-up, and usher in a period of reforms that would finally propel India’s great potential.


  • India is very protective of its domestic industries and willing to pursue protection of domestic firms in order to gain scale to compete at a global level (i.e. the infant-industry theory). It is increasingly doing so with its domestic tech sector, as it wants to exclude American and Chinese tech giants. This is also visible in India’s reluctance to participate in the Regional Economic Comprehensive Partnership, the world’s largest free-trade agreement in the Asia-Pacific region.
  • India’s rising economic power might come with the ambition to become a global superpower. It iscurrently building economic ties along a horizontal line between South Asia and the Middle East. Furthermore, an Indian maritime strategy is emerging as the country seeks to employ its power in the Indian Ocean, all the way from Southeast Asia to East Africa. This will put India at odds with China, which is seeking influence in the same countries. Furthermore, together with Japan, India is currently developing a trade and investment project: the Asia Africa Growth Corridor (“AAGC”) as an alternative to China’s BRI.