(Reuters) – India’s Narendra Modi is set to be sworn in as prime minister on Sunday for a third straight term, a rare feat that will also come with new challenges as the populist leader is forced to rely on allies to form a government.
Here are some of the key issues that Modi will have to deal with in office.
FUNDS, SPECIAL STATUS FOR ALLIES
In the near term, the Modi government may have to spend more to meet the demands of allies who helped it secure a majority in parliament, testing the government’s purse strings.
Regional parties in Modi’s alliance have demanded more funding for the state and federal cabinet positions during negotiations on a new coalition government.
Andhra Pradesh state’s Telugu Desam Party and Bihar’s Janata Dal (United) also pressed for long-standing demands for special status for their states, which would have allowed them to receive more federal development funds on easier terms.
ECONOMIC DISPARITY
India’s economy grew 8.2% in the last fiscal year, one of the fastest rates among major economies, but voters pointed to disparities on the ground, with growth more pronounced in cities than in the vast hinterland.
The economy has jumped five places to become the fifth largest in the world in the past decade under the Modi government and says it will lift it to the third position. But the country’s per capita income is still the lowest among the G20 countries.
However, S&P Global Ratings in late May raised India’s sovereign rating outlook to ‘positive’ from ‘stable’ while retaining the rating at ‘BBB-‘, saying the country’s robust economic expansion is having a constructive impact on credit metrics.
“The middle class is the driving force of the country,” Modi said at an alliance meeting on Friday. “In the coming days, we will work to increase the savings of the middle class, improve the quality of life, and see what we need to change in our rules to achieve it.”
INFLATION ABOVE C.TARGET BANK
Annual retail inflation in April was at 4.83%, slightly lower than March, but still above the central bank’s 4% target.
Food inflation, which covers almost half of the overall consumer price basket, was 8.70% annualized in April, compared to an increase of 8.52% in the previous month. Food inflation has been more than 8% year-on-year since November 2023.
For the current year, the Reserve Bank of India has projected headline inflation at 4.5% while increasing the economic growth outlook to 7.2%.
Modi has banned exports of wheat and rice to contain domestic inflation.
UNEMPLOYED
Unemployment in India has also been one of the main issues in the election campaign with the Congress accusing the Modi government of doing little to provide jobs for the youth.
Modi’s Bharatiya Janata Party (BJP) lost a third of the seats it held in rural constituencies, an analysis of voting data showed, reflecting rural discontent over a lack of jobs and inflation.
India’s unemployment rate rose to 8.1% in April from 7.4% in March, according to the Private Think Tank for Monitoring the Indian Economy.
Government estimates for the latest January-March quarter showed that the city’s unemployment rate in the 15-29 age group rose higher to 17% from 16.5% in the previous quarter.
The city’s overall unemployment rate in the January-March quarter stood at 6.7%, compared with 6.5% in the previous quarter, according to government data.
The Indian government does not release monthly unemployment figures for rural India.
FOREIGN RELATIONS
India’s soaring foreign policy and assertive foreign policy have been hailed as recent achievements by the Modi government.
However, major diplomatic strains remain with China fueled by border clashes in 2020 that left 20 Indian soldiers and four Chinese soldiers dead. Modi said last month that the country had to deal with the “persistent situation” on its border.
The Modi government has been trying to attract foreign companies to diversify its supply chain beyond China.
Relations with Canada have also been strained after Ottawa and Washington accused Indian officials of leading a plot to assassinate Gurpatwant Singh Pannun, a Sikh separatist and dual citizen of the United States and Canada.
In May, Canadian police arrested and charged three Indians over the killing of Sikh separatist leader Hardeep Singh Nijjar last year and said they were investigating whether the men had ties to the Indian government.
TAXATION
Industry lobby groups this year called for tax exemption limits for individuals to be increased and linked to inflation to help boost consumption.
The Confederation of Indian Industry also urged the government to review the capital gains tax structure by bringing consistency in tax rates for various asset classes such as debt, equity and immovable assets.
Modi in his third term could be forced to look at tax cuts for individuals to boost consumption, which is the weak link in the fast-growing economy.
FARMER
Stagnant farm incomes are a major sign of growing inequality between urban and rural India that has fueled widespread protests. The BJP had promised to double farm income by 2022 in its manifesto for the last election, but failed to do so.
Even so, Modi has set a new target of increasing rural per capita income by 50% by 2030, but farmers remain skeptical of the plan, Reuters previously reported.
LAND, LABOR REFORM
In February, a BJP spokesperson said Modi could make labor reforms a priority if he wins the general election. But with pressure from the coalition government and a stronger opposition, Modi may have to delay the reforms.
The new labor code, which will make it easier for companies to hire and fire workers and impose restrictions on the operation of unions, was approved by parliament in 2020, but has not been implemented after resistance from workers and the state.
In his first term as prime minister, Modi tried to push through legislation that would make it easier to buy land for industrial corridors, rural housing and electrification, and for defense purposes. However, the plan was put on the backburner amid stiff resistance from the opposition.