Modi’s coalition era: a new chapter for Gulf ties?

Alamy

Narendra Modi embarks on his third term as India’s prime minister under unprecedented conditions – his first venture into coalition governance since the Bharatiya Janata Party (BJP) first took power in 2014.

The BJP still holds the reins but must now share the saddle, potentially complicating its foreign trade and investment policy, especially with crucial partners like the UAE.

Ruchir Punjabi, chair of India’s School of Policy and Governance, tells me that “horse trading” with coalition partners is likely to intensify, posing challenges to Modi’s governance style. 

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Though Indian elections rarely hinge on foreign policy, the implications of this outcome add complexity to India’s external economic engagements, particularly with Gulf nations.

Despite a cabinet that ostensibly looks unchanged, domestically the scene is set for more drama as the BJP’s reliance on coalition partners introduces a new layer of unpredictability.

The need to negotiate with and appease various coalition factions could decelerate or even reshape some of Modi’s ambitious economic and trade objectives that are already lagging.

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This is especially pertinent to the India-UAE relationship, where the comprehensive economic partnership agreement promised economic transformations yet has only seen a modest 2.5 percent increase in non-oil bilateral trade growth since its inception 17 months ago.

Moreover, achieving the $75 billion UAE investment target in India, discussed since 2015, remains a challenge, Viraj Solanki, a research fellow at the International Institute for Strategic Studies in London, tells me.

So far it stands at $15.3 billion.

Aparna Pande, research fellow at the Hudson Institute in Washington DC, warns that the administration needs to encourage more sectoral entries, elevate FDI limits and stabilise tax and regulatory frameworks to realise these targets. 

This is compounded by India’s persistent protectionist bent, which Pande believes has intensified since the 1990s and is unlikely to recede, complicating the Modi administration’s efforts to deepen economic ties with the UAE.

Foreign investors hoping for less red tape and a swift reform agenda in India may be let down.

AGBI reported last month that even the likes of Abu Dhabi’s sovereign wealth fund Mubadala have experienced delays in infrastructure and renewable projects.

Protectionism unfortunately will continue as that has always been India’s default view

Aparna Pande, Hudson Institute

Ground has yet to be broken on a massive Saudi-UAE oil refinery at Raigad near Mumbai, five years after it was announced, because of opposition from local residents.  

“Protectionism unfortunately will continue as that has always been India’s default view, and with almost every country around the world turning protectionist it is difficult to see that India does not do so,” Pande says.

Investment from India into Gulf countries has dropped, despite growth in bilateral trade, as a result of this approach. 

While Modi’s foreign policy might remain robust on paper, the real test will now be its execution amidst domestic economic discontent that cost him his majority win. 

Even as stock markets have reached record highs, youth unemployment, inflation and inequality have also soared, with only a small portion of Indians – and billionaire allies – benefiting from the boom. 

Yet, there is still an undercurrent of optimism among foreign investors. 

Sachin Kerur, managing partner at Reed Smith Middle East, says that if Modi’s government can reassure the UAE’s FDI community of its long-term commitment, substantial UAE investment could follow. 

“UAE SWFs and the private sector will eye the largest population on its doorstep and the high growth Indian economy with relish,” he says. 

Punjabi echoes this sentiment, emphasising the unique growth opportunities the Indian market offers to global investors.

“The size of the Indian economy gives people abroad the ability to deploy capital at the scale that they want to,” he says. 

“You don’t get 7 to 8 percent growth elsewhere. Most developed economies are now growing at 3 percent and some are already in recession.”

Despite all its challenges, “India is for the brave,” he adds. “You capture the opportunity when you know what it takes to build something.”

Kunal Sumaya, Singapore-based market head global NRI (Non-Resident Indians) at Julius Baer, also highlights significant wealth creation among NRIs due to growth in India. 

Of the high net worth NRI clients Sumaya works with, he says 80 percent have investments in India, and half are planning to increase their investments within the next three years.

To be clear, while Modi’s new term may not continue to wield dictator-style decision-making, the BJP remains the dominant force in Indian politics, and his popularity – in India and globally – continues unabated.

Modi himself has made seven visits to the UAE since he took office, including one at the start of this year’s election campaign. 

The new coalition dynamics will now test the reelected prime minister’s ability to merge decisive foreign economic policy actions with inclusive domestic governance.

AGBI will be watching closely as the Modi 3.0 dynamics unfold.

Megha Merani is a Dubai-based reporter