Analysis

The BJP-led National Democratic Alliance (NDA) won a landslide victory at the April-May general election, delivering a second term for Modi, but the prime minister's party last month performed below expectations in state elections.

BJP challenges

In Maharashtra, one of the states where the BJP underperformed, Modi's party will have an eye on regaining power as early as next year. Maharashtra is currently under direct rule from Delhi, as no party was able to form a government after the election.

A post-poll spat over the chief ministership with the locally based Shiv Sena prevented the BJP from forming another NDA government.

Yet even if Shiv Sena now forges a governing coalition with erstwhile rivals, as now appears close at hand, the alliance will quickly unravel. If Shiv Sena then resolves its differences with the BJP, the two can return to government.

Modi's party will face polls in Bihar state, likely in October-November, and the national capital territory of Delhi, probably in February.

In the light of what has happened in Maharashtra, the BJP will tread more carefully with its key local ally in Bihar, since its share of power in the state depends heavily on it.

Chief Minister Nitish Kumar's Janata Dal (United) currently has more seats than the BJP in the state assembly. Modi's party is unlikely to win a majority in Bihar, but even if it outperforms its governing partner, it will probably avoid pressing for the chief ministership.

In Delhi, the BJP will need a huge swing to wrest power from the Aam Aadmi Party.

Modi's party will struggle to take control of the capital's legislature, but the tone of its campaigning early next year will give an important indication of how far it is attempting to address rising concerns over the economy (see INDIA: Economy will be Modi’s personal focus - June 5, 2019).

Economic woes

The Reserve Bank of India (RBI) forecasts GDP growth of 6.1% for the fiscal year ending March 2020 (rising to 7.0% in 2020/21), which would be the lowest full-year rate since Modi came to power in 2014 (see INDIA: Economic growth will slow further - October 29, 2019).

Even this may be optimistic. Annual growth was just 5.0% in the April-June quarter and estimates suggest it may have slowed further in July-September, reducing the likelihood of a rebound in the second half of the fiscal year. The main reason is that consumption, long the key driver of India's growth, is down.

Modi's government will be reluctant to increase spending to help stimulate demand, wary of breaching its fiscal deficit target for 2019/20 of 3.3% of GDP. Moody's earlier this month lowered India's credit rating outlook to 'negative' from 'stable', while keeping the country's rating at Baa2.

Meanwhile, bad debt in the banking and shadow-banking sectors is curtailing lending and in turn crimping investment. The RBI has cut interest rates five times this year to encourage businesses to spend more, but retail inflation last month exceeded the central bank's target of 4%, suggesting there is limited scope for further monetary loosening.

Modi appears to be counting on increased foreign direct investment (FDI) to boost growth. Reports suggest his government may ease restrictions on FDI by joint ventures and wholly owned subsidiaries of Indian companies.

Yet the crisis facing UK telecoms giant Vodafone, which is in a joint venture with Indian company Idea, threatens to undermine confidence among prospective foreign investors in the country.

A recent Supreme Court judgement ordering telcos to pay billions of dollars in historic fees and fines has hit Vodafone, and the Delhi-based Bharti Airtel, especially hard. The government has now allowed operators to defer spectrum payments for two years from the start of 2020/21, recognising that some are at risk of collapse.

The pressure on Vodafone and Bharti Airtel is due not only to taxes and regulation, but also the dominance of India's mobile phone industry by Mukesh Ambani's Reliance Industries (see INDIA: Telecoms industry will see heavy job losses - December 11, 2017).

The conglomerate's Reliance Jio subsidiary has increased margin pressures on its competitors with its low-cost data provision. It now says it will raise prices, after Vodafone and Airtel announced tariff hikes.

Vodafone has denied that it is considering an exit from India, but its survival there will probably depend on the government offering further financial relief.

International horizons

Exports have never contributed much to India's economic growth, but Delhi will aim to redress some of its trade imbalances with regional partners.

India earlier this month decided not to join a Regional Comprehensive Economic Partnership (RCEP), a projected free trade agreement involving the ten ASEAN states and several Asia-Pacific partners with which the South-east Asian bloc has existing FTAs (see INDIA: Bilateralism will define regional trade policy - November 19, 2019). Delhi's main concern was over dumping of cheap Chinese imports, but it also wanted greater market access for its services sector.

Despite the 15 other RCEP participants keeping the door open for India, Modi's government is unlikely to perform a U-turn, especially since the trade pact is unpopular domestically. RCEP will likely be finalised next year without India.

Delhi will meanwhile aim to make greater use of its FTA with ASEAN, which currently covers goods, as well as stepping up its services trade with ASEAN economies. Modi wants closer ties with South-east Asia as part of his 'Act East' policy.

Trade negotiations with China will be rather more lukewarm, for all the good intentions Modi and Chinese President Xi Jinping may express at their third informal summit.

Modi's main foreign policy victory next year is likely to be a new trade deal with the United States, which should ease concerns in Delhi and Washington over fair market access. In recent months, a tariff spat has put a damper on India-US ties (see INDIA/US: Ties will be sound but susceptible to shocks - October 8, 2019). However, the US trade representative has been in India this week, and an initial package appears close at hand.

Separately, the United States would play a key restraining role in the event of an uptick in India-Pakistan tensions over Kashmir, a region over which the South Asian neighbours dispute sovereignty.

There is a risk of deepening insurgency in Indian-administered Kashmir, especially once the snows melt early next year. Delhi earlier this year abrogated the former Jammu and Kashmir's special constitutional status and statehood, irking Islamabad.

Any militant attack on India that Delhi blames on Pakistani sponsorship would substantially raise the risk of open cross-border conflict.