A stable government and a strong medium-term economic growth outlook will make it easier for the re-elected BJP government under PM Modi to direct economic resources and diplomatic efforts towards managing India’s complex security environment during the remainder of the decade. Indian domestic politics has been dominated by the Bharatiya Janata Party (BJP) and Prime Minister Narendra Modi since first coming to power in 2014. Prime Minister Modi dominates the BJP and the BJP and its electoral coalition dominates national politics. The Indian opposition remains fragmented and the Congress party weak. The general election set to be held in April/ May will see the prime minister secure a third five-year term and high approval ratings. The BJP’s dominant position will give the government significant leeway to pursue its domestic economic and foreign policy agenda. On the flipside, Modi policies have contributed to inter-ethnic tensions between Hindu nationalism and India’s Muslim minority. The outbreak of inter-ethnic violence will remain a risk during Modi’s third term in office, which might make it complicate relations with some its Western partners.
After a decade in power, the Bharatiya Janata Party (BJP) and Prime Minister Narendra Modi remain very popular. The Congress party and other opposition parties are politically weak and very fragmented. In December 2023, PM Modi’s approval rating stood at 76%, according to Morning Consult, making him the most popular head of government in the world. In recent polls, the right-wing National Democratic Alliance (NDA), which is led by the BJP, led the Indian National Developmental Inclusive Alliance (I.N.D.I.A.), which is led by the Indian National Congress, by 8-13 percentage points. Recent polling projects the right-wing alliance between 296 and 366 out of 543 seats in the lower house, compared to 350 seats in 2019. This would continue to represent a sizable margin and allow the BJP and Modi to retain dominance of Indian national politics. In the last interim budget presented before the 2024 elections, the Modi government opted in favor of increased funding for infrastructure investment rather than more traditional pre-electoral tax cuts for the middle class and significant in increases in social spending, including subsidies for poorer households. The budget allocated the equivalent of $130 billion to fund physical infrastructure, which represented a more than 10% annual increase. A more growth-friendly macro-economic policy is made possible by the BJP’s electoral dominance.
India’s medium-term economic growth outlook is strong, which will help its double its economic size over the next decade and consolidate its position as the world’s third-largest economy. India has overtaken China as the world’s fastest-growing major economy in the world. Moreover, India will likely be able to sustain real economic growth of more than 6% annually during the remainder of the decade, flanked by broadly sensible macroeconomic policies. India will also benefit from increased foreign investment in the context of multi-national corporations’ supply chain reengineering and friend-shoring. Solid domestic investment levels and an increasing focus on much needed, productivity-enhancing infrastructure investment in the context of manageable fiscal policy and government debt levels also bode well for India’s medium-term economic growth.
India is today the world’s fifth-largest economy in nominal dollar terms and it is the third-largest economy in terms of GDP measured purchasing-power parity. India is currently ranked 121 out of 185 countries in terms of per capita income at PPP, just below Laos and just above Uzbekistan, with a per capita income of $7,100. By comparison, US and Chinese GDP per capita income was $18,700 (69) and $59,500 (11). Both the IMF and the OECD project Indian real economic growth to average more than 6% in the next few years. While this is significantly lower than the growth China registered during its heyday, it does make India the fastest-growing major economy in the world. India ’s real economic growth rate now comfortably exceeds China’s growth rate of 4-5%. On its current trajectory, India’s economy will more than double in size from less than $10 trillion in 2020 to more than $20 trillion by 2030. In non-inflation adjusted terms, this will make India’s economy three times larger than Japan’s today. India’s per capita income will exceed $10,000 by 2030.
India is benefitting from a favorable demographic momentum, but also from a major, favorable demographic transition. The country’s fertility has declined to just over 2, which is below the replacement ratio of 2.1. This is translating into an improving dependency ration (ratio of people of working age/ people of non-working age), which creates favorable conditions for increasing the national savings rate and investment, while expanding the labor supply in relative (and absolute) terms. Investment in India has averaged around 30% of GDP in the past few years. Interestingly, this is lower than at the beginning of the past decade, which suggests that India has significant room to increase both savings and investment in the next few years. Indeed, China managed to generate a savings rate of 50% and real GDP growth of 10% during its high-growth phase.
With the government not having to worry about its ability to hang on to power over the next five years and with strong economic wind in its sails, India is well-positioned to mobilize the resources and expend the diplomatic efforts necessary to pursue its foreign policy goals in a continuously complex international security environment. India’s greatest strategic challenge is to manage security and economic relations with China, including in the Indian Ocean, where Beijing’s geostrategic and commercial interests are expanding. This will force India to compete for influence in countries like Sri Lanka and the Maldives. While Pakistan, India’s traditional geopolitical rival, is currently experiencing significant domestic political and economic challenges, India also needs to manage its long-standing rivalry with Pakistan. Meanwhile, India will seek to form a closer (but not too close a) relationship with the United States without entering formal alliance commitments. The goals is to partner enough with the United States to deter China without running the risk of being drawn into a broader US-Chinese conflict. Finally, India needs to diversify its sources of foreign defense purchases after Russian sales to India have declined in the wake of the Ukraine war. Europe and the United States are the only other major suppliers. India’s rapid economic development, increasing defense expenditure and domestic political stability will make it an attractive partner for the United States and European countries.
Pakistan and India are the greatest strategic challenges India will be continue to face. Pakistan remains a major security concern for India. India and Pakistan have fought wars in 1947, 1965, 1971 and 1999. While Pakistan is experiencing significant domestic and economic challenges, which makes it more difficult for Islamabad to compete strategically, instability does also create risks. The source of the conflict, control over Kashmir, and broader security competition will continue to require India’s attention, not least because Pakistan has nuclear weapons, which is why domestic political instability is not seen as a good thing by New Delhi. Border disputes are also an important source of Indian-Chinese security competition. India fought wars with China in 1962 and 1967. More recently, border skirmishes in disputed areas led to several deaths. China also has friendly ties with Pakistan and is a major provider of financial support to India’s rival, including infrastructure projects that New Delhi regards as threatening (e.g. Gwadar). China has also been pushing into maritime space around India to secure access to the oil-rich Gulf states. This is leading to intensifying security competition in India’s “near abroad”, including Sri Lanka and the Maldives.
India will continue to seek closer, if selective cooperation with the United States and Europe. India joined the Quadrilateral Security Dialogue (Quad), which brings together the United States, Japan, Australia and India. Among other things, the Quad is committed to a Free and Open Indo-Pacific, and it is the sort of loose security cooperation India seeks and prefers to more formal treaty commitments to deter China. India also joined thirteen other countries under the U.S.-led Indo-Pacific Economic Framework (IPEF), which has a similar purpose in the economic realm. Meanwhile, India has refrained from joining Western sanctions targeting Russia and in fact increased its energy trade with Russia, which shows the limits to India’s alignment with Western countries. India is the world’s fifth-largest military. In 2022, it spent more than $80 billion on defense (in current dollar terms). Strong economic growth will allow the government to increase spending by 6-10% annually in nominal terms. Indian defense equipment imports from Russia have declined sharply in the context of the Ukraine war, which will lead India to seek closer cooperation with other countries able to offer advanced defense equipment. In June 2023, Germany and India signed an agreement for the possible construction of six submarines for India. In January 2024, France and India agreed to establish a defense industrial partnership for joint production of defense equipment, including helicopters and submarines.