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India election

Modi and BJP return more formidable but so do economic challenges

Financial reform is the priority while judicial, labor and land issues also press

Prime Minister Narendra Modi addressed the Bharatiya Janata Party at its headquarters in New Delhi after a landslide general election victory on May 23. (Photo by Kosaku Mimura)

NEW DELHI -- Prime Minister Narendra Modi's strengthened mandate to govern India for the next five years gives him a second chance to tackle pressing economic issues, including crises in the agrarian and banking sectors, and reviving private investment.

Modi's ruling Bharatiya Janata Party scored a stunning victory in a bitterly fought general election held in seven phases from April 11 to May 19, securing over 300 of the 543 seats in the Lok Sobha, the lower house of parliament -- up from 282 in the 2014 election. A party or coalition needs 272 seats to form a majority, and the BJP and its partners in the ruling National Democratic Alliance now occupy over 350 seats.

The landslide returns the BJP at the head of the NDA, and makes it once more the first party since 1984 with its own outright parliamentary majority. This means that the BJP again will not have to be beholden to coalition partners, which enhances its ability to undertake bold reforms.

Sunil Kumar Sinha, the principal economist at Fitch Group's India Ratings and Research told the Nikkei Asian Review that the new government's priorities should be reviving private corporate investment, dealing with the perennially distressed rural sector, and addressing financial sector woes in banks and other finance companies.

Banks have been burdened with bad loans for some time, and that has also become more of a problem for non-banking financial companies (NBFCs), Sinah told Nikkei. As a result, many micro, small and medium enterprises face problems securing loans. "More than the liquidity, it is the issue of the confidence crisis," Sinha told Nikkei. "Banks have become extra cautious in lending to NBFCs because of creditworthiness."

Reform in contract enforcement and dispute settlement is another agenda item. "We have an overburdened judiciary and cases take a long time," Bidisha Ganguly, chief economist at the Confederation of Indian Industry, told Nikkei before the election results came through. She said delays in government payments to the private sector are a particular concern: "[When] government projects are given to the private sector there is a long delay in payments -- these are the things the government needs to work on."

Land and labor reforms are also priorities. "Both are widely seen as being needed for the government to increase manufacturing as a share of the economy," Eurasia Group, an investment consultancy, reported recently. It noted that some 435 infrastructure and road projects have been stalled by delayed land acquisitions according to government figures.

Eurasia also noted that during Modi's first term land and labor reforms were stymied by the lack of a majority in the Rajya Sabha, the upper house of parliament, where members are elected by state assemblies. Land and labor reforms need approval from both houses. The situation can only change if the BJP wins more regional elections.

Prior to becoming prime minister in 2014 with a pro-business platform, Modi served four times as chief minister of the western state of Gujarat, and has been credited for its economic advancement. National growth was relatively strong in his first term, and currently hovers around 7% annually.

Notable economic policies in the last five years include the introduction of an insolvency and bankruptcy code; imposition of a goods and services tax to replace a number of indirect taxes; and demonetization of high-value bank notes in a bid to crack down on black cash. The banknote cancellation and chaotic rollout of the new consumption taxes caused major disruptions to small businesses in what remains a highly cash-dependent economy.

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