The result of the Indian general election in June 2024 was disappointing for Prime Minister Modi and his BJP party. Contrary to widely-held expectations, the BJP narrowly failed to obtain an overall majority in the Lok Sabha, India’s lower house of parliament. That means it will rely on its alliance partners to control the lower house (272 seats are needed for a majority). As The Economist commented “The spectacle of the Modi machine faltering has shocked the public, the political world and financial markets.”
Raghuram Rajan, former Reserve Bank of India president, warned shortly before the election against India “believing its own hype” about stronger economic performance. That now looks to have been a very prescient warning.
It is the case that India had one of the strongest growing economies in the world in 2024, fuelled by strong investment, improving consumer confidence, a stronger banking system and housing market.
Strong growth is expected to continue in 2025 and 2026. The IMF sees GDP growth running at over 6% in the next two years. But even if such a rate of growth is maintained it is not likely to be enough to achieve Modi’s ambition of India moving into the “high income” category by 2047, the centenary of independence.
Setting ambitious targets is, of course, not to be dismissed. Ambitious targets for infrastructure development were a key feature of Modi’s first ten years in office. Although in some cases they were missed, substantial progress was made in, for example, electrification of the railways. That is helpful is achieving emissions reduction and India does have a net zero policy – but with a target date of 2070, twenty years later than most economies.
The major challenges for the coming years relate to: reducing high levels of inequality and corruption; cleaning up the environment - India has the most polluted cities in the world; and finding jobs for a rapidly growing young population.
One challenge that India has faced in the past – high inflation – does now seem to have been vanquished. Inflation is now below the bottom of the RBI’s target of 4% +/-2%, at just 0.25% in October 2025. Much of that is due to a recent fall in food prices and the GST rate: underlying inflation is 4.4%.