With Prime Minister Narendra Modi entering a historic third term, the Bharatiya Janata Party (BJP) faces fresh challenges after failing to secure an outright majority in the lower house of Parliament.
Samir Kapadia, Founder & CEO of India Index, examines the impact of this development on India’s economic and geopolitical future.

Power-Sharing in a Weakened Mandate

Despite securing a third term, Modi’s BJP won only 240 seats, falling short of the 272-seat majority required to form a government independently. This result forces Modi to seek power-sharing agreements with smaller allies within the National Democratic Alliance (NDA), which, according to local media, is expected to secure a combined 294 parliamentary seats.

This outcome raises questions about Modi’s popularity and could potentially stifle the implementation of key policies. The BJP’s significant loss of 63 seats compared to the 2019 general election reflects the growing challenges the party faces in maintaining its dominance.

Modi, however, declared victory, stating, “People have placed their faith in the NDA for a third consecutive time! This is a historical feat in India’s history,” as vote counting neared its conclusion.

Economic Concerns and Voter Sentiment

The reduced majority for the BJP signals growing dissatisfaction among voters, particularly in the face of rising unemployment and inflation. Yamini Aiyar, former president of the New Delhi-based Centre for Policy Research, noted that while Modi remains a popular figure, “the shine has worn off as the everyday lived realities of unemployment, inflation, and governance are dominating voters’ minds.”

A survey conducted by the Centre for the Study of Developing Societies in April revealed that unemployment was the top concern for 27% of the 10,000 people surveyed. More than half of the respondents reported that finding a job had become more difficult during Modi’s second term, reflecting the growing economic challenges in the country.

Shilan Shah, deputy chief emerging markets economist at Capital Economics, emphasized that Modi will begin his term with a weakened mandate, making the passage of contentious economic reforms more difficult. However, Shah noted that Modi will still be able to govern as the head of a stable coalition, potentially maintaining economic growth at 6-7% annually.

Market Reactions to the Election Outcome

The election results sent shockwaves through India’s financial markets. On Tuesday, the benchmark indexes Nifty 50 and BSE Sensex plunged 8% as it became clear that the BJP might fall short of a majority. This sharp decline followed record highs on Monday, when both indexes gained more than 3% after exit polls predicted a thumping majority for Modi’s BJP.

Market heavyweights such as Adani Ports and Adani Enterprises saw significant losses, with both stocks plunging by more than 20% during Tuesday’s session. Major banks, including State Bank of India and ICICI Bank, also experienced sharp declines.

The Indian rupee weakened by 0.5% against the dollar on Tuesday, reversing the gains it had made the previous day.

Modi’s Economic Legacy and Future Challenges

Under Modi’s leadership, India has experienced robust economic growth, with the country’s GDP expanding by 8.2% in fiscal 2024. The International Monetary Fund (IMF) projects India’s economy will grow by 6.8% in 2024 and 6.5% in 2025, outpacing China’s growth projections of 5% and 4.5% for the same years.

Samir Kapadia highlighted the importance of Modi’s economic strategy in the face of global challenges. “PM Modi will have to flex his muscles against adversaries like China. That will involve signaling support for indigenous defense manufacturing capabilities,” Kapadia said, pointing to the strategic priorities outlined in the BJP’s manifesto.

Modi’s vision for his third term includes making India one of the world’s top three economies, aggressively combating poverty, opening new avenues for growth, and fighting corruption. However, this ambitious agenda may face significant hurdles given the BJP’s reduced majority and the need for coalition support.

Balancing Economic Growth and Democratic Values

While India’s economic growth under Modi has been impressive, concerns about the country’s democratic decline have also been raised. The V-Dem Institute’s 2024 report highlighted the BJP’s use of laws on sedition, defamation, and counterterrorism to silence critics, raising questions about the health of India’s democracy.

Nevertheless, some observers see the electoral process itself as a testament to India’s democratic resilience. Malcolm Dorson, senior portfolio manager and head of emerging markets strategy at Global X ETFs, remarked, “The election also shines a light on India as a rising star that’s built on democracy, and I’m glad that it is bringing a lot of attention to all the dynamic growth that we’re seeing in the country right now.”

Conclusion: A Complex Path Forward

As Modi begins his third term, his government faces a complex path forward. The need to balance economic growth with coalition dynamics, address rising unemployment, and navigate geopolitical tensions will be critical to maintaining India’s upward trajectory. 

Samir Kapadia’s insights underscore the challenges ahead, as Modi seeks to solidify his legacy and steer India toward becoming one of the world’s top economies.

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