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Modi Takes Charge in India

  • Prime Minister Modi comes to power with an overwhelming electoral mandate.

  • The policy challenges facing India will require him to work with the opposition.

  • To successfully manage India’s fractious politics, he must build coalitions.

India's recent elections gave the center-right National Democratic Alliance, led by the Bhartiya Janata Party, an absolute majority in the lower house of parliament. The victory by the business-friendly alliance has raised hopes that economic reforms, needed to return India to robust growth, will now be pushed through expeditiously.

There is little doubt that incoming Prime Minister Narendra Modi will assiduously promote development and growth. But he will face a plethora of limitations created by India's federal constitution.

Modi has his work cut out for him. The Indian economy lost steam starting in 2011, as the effects of the post-Great Recession stimulus began to fade and Europe, India's largest trading partner, entered another recession.

At the same time, persistently high inflation has limited the central bank's policy options. For the last few years India has been stuck in stagflation.

Meanwhile, a string of corruption scandals involving prominent politicians has paralyzed the government, led by the Congress Party. With a new party coming in, many now hope for an end to despair among businesses and consumers as policy initiatives that have long gathered cobwebs are reinvigorated.

Modi's victory gives him a mandate to take bold steps. For the first time in 30 years, a single party, the BJP, has enough members to form a government on its own. This is also the first time since India became independent that a party other than Congress has won an absolute majority in the lower house, or Lok Sabha.

The upper house weighs in

Notably, however, the BJP and its allies in the National Democratic Alliance do not control the upper house of India’s parliament, the Rajya Sabha. Unlike the lower house, whose members are directly elected, the upper house is elected by India's state legislatures. There the NDA is a minority party, with fewer members than the Congress Party and its allies. Given the current distribution of political power in the states, this is unlikely to change for many years.

To successfully push through any legislation except the budget, Modi needs a majority in the Rajya Sabha as well as in the Lok Sabha. To amend the constitution, he would need not only the approval of both houses of parliament but also that of most state legislatures, where regional parties dominate. This makes consensus and coalition-building the key to success for any party attempting to govern India.

A good record in Gujarat

Modi built a reputation as an effective executive while serving as Chief Minister of Gujarat for 12 years, during which time the state enjoyed one of the fastest growth rates in the country. The key to success as a chief minister in India is effectively controlling the bureaucracy, and Modi has proven a master at that. During his reign in Gujarat, the state developed a reputation as being business-friendly and able to cut red tape and efficiently approve new investment. Small wonder that businesses, which have historically shied away from openly supporting political parties, flocked to Modi's campaign vocally and with money.

Yet to effectively lead the central government, Modi will need to build coalitions. Many of India's policy challenges will require him to bring along the state governments. These are not skills he previously demonstrated; indeed, in Gujarat he developed a reputation for riding roughshod over the opposition and not tolerating dissent within his own party or the government.

Keys to reform

Whether to implement a nationwide goods and services tax or to ramp up new infrastructure investment, Modi will need to bring the state governments along because implementation of these initiatives lies in their domain. To privatize or overhaul public sector industries he also will need to work with the states, because many of the industries are under their control.

To reform labour laws he will need support from other political parties, or risk cankerous battles with India's trade unions. To reform insurance or banking he will need support from opposition parties in the Rajya Sabha.

While a change in India's government is welcome, much will depend on how well Modi can work with the opposition, a skill he is yet to demonstrate.

Virendra Singh is a Director at Moody's Analytics.

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