India: BJP likely to win elections, facilitating continued strong GDP growth and fiscal consolidation
On 4 June, results will be announced for elections to the lower house of Parliament, the Lok Sabha. The party which commands a majority will be able to form a government. Opinion polls suggest that the ruling Bharatiya Janata Party (BJP) will win a third term, beating out the opposition INDIA coalition.
According to most market analysts, a BJP victory would help ensure robust economic activity. Since the BJP came to power in 2014, GDP growth has averaged 5.7% per year, one of the best performances in Asia. In part, this is due to structural factors, including rapid population growth, but BJP policy has played a role. The party has prioritized macroeconomic stability, with the Central Bank adopting inflation targeting in 2016; it has emphasized infrastructure spending, with investment’s share of GDP growing in recent years after declining for a decade; and it has focused on manufacturing output, with subsidies for firms introduced as part of the government programs ‘Make In India’ in 2014 and ‘Product Linked Incentives’ in 2020. The BJP’s election manifesto shows the party will continue to pursue these policies if it is re-elected: The main themes of its manifesto include ‘financial macro stability’, making India a ‘global manufacturing hub’ and providing ‘world-class infrastructure’. This, in turn, should boost GDP growth ahead: Our panelists project that GDP growth will range between 6.5–6.7% from FY 2024 (April 2024–March 2025) to FY 2028 (April 2028–March 2029). Even more impressively, our panelists see the BJP doing this while tightening its fiscal belt: Our Consensus is for the government to achieve its target for a budget deficit of less than 4.5% of GDP by FY 2026; in the interim, pre-election government budget published in February, the BJP largely eschewed populist, high-spending measures.
The INDIA coalition, in the unlikely case it were to emerge victorious, would likely maintain the essence of the BJP’s policies, ensuring similar GDP growth rates and fiscal balances. That said, its manifesto pledges suggest its policy platform would be slightly more populist. Overall, under an INDIA-led government, growth would likely be higher in the short term but potentially lower in the medium term, and the fiscal deficit would likely be wider. Two of INDIA’s key policy pledges are a waiver of loans for farmers and a universal basic income for poor families; by relieving financial burdens on both groups, the policies would aid domestic demand in the near term. However, they would be pricey: The first could cost between 1.0–2.6% of GDP, and the last debt waiver for farmers, in 2008, cost around 0.9% of GDP. By raising government spending, these policies are likely to widen the fiscal deficit, as well as potentially requiring cuts to infrastructure spending.
Given its strong lead in opinion polls, the real question may not be whether the BJP wins but by how much. A resounding victory could give the party the political capital it needs to press ahead with structural reforms—to land, labor and agricultural markets, among others—that are largely absent from its manifesto due to their politically controversial nature; although India has jumped up the World Bank’s ease-of-doing-business index since the BJP came into government, the country still remains in 63rd place, far below fellow economic behemoth China in 31st. Meanwhile, although a resounding victory for the BJP could further inflame communal tensions in the country—especially in the Muslim-dominated Kashmir region—any negative impact on investment resulting from these concerns is likely to be muted; most market analysts think that investors are more likely to focus on economic growth, rather than political risk.
On the implications of a BJP victory, DBS’s Radhika Rao stated:
“We foresee limited fiscal implications from these [manifesto] announcements as part of these were included in the interim budget and the manifesto did not outline any new big-bang reforms or fresh social welfare spending programs. We maintain our FY25 fiscal deficit assumption at -5.1% of GDP with the existing borrowing program.”
Meanwhile, analysts at Nomura said:
“If the BJP does indeed secure a simple majority on its own, then this should calm investor nerves. This scenario would largely ensure policy continuity, enable a sustained focus on capex while consolidating fiscal finances, support macro financial stability and a focus on inclusive growth. Given its higher seat share in the lower house, and rising seats in the upper house, the government may focus on the more politically contentious reforms around the factors of production including land, labour and capital.”