Top five economic challenges the next government must tackle after May 23

A set of deep-rooted economic challenges awaits India's new government after election results are announced May 23.

Arresting an economic slowdown and nursing the nation’s financial sector back to health will be the immediate priorities for the next administration if Prime Minister Narendra Modi’s coalition wins a second term -- as exit polls suggest -- or his political opponents wrest power from him. A slowing global economy and a protracted trade war between the U.S. and China add to the urgency to fix things at home.

With 7% expansion in the year through March, India has held the crown as the world’s fastest-growing major economy. But that’s quickly changing this year as consumption -- which makes up 61% of India’s gross domestic product -- weakens sharply, with ripple effects on new investments. GDP data due May 31 will probably show growth cooled in the three months through March from a six-quarter low of 6.6%.

Here's a look at what else the new government should be worried about:

Budget Deficit

Going into the elections, both Modi’s Bharatiya Janata Party and the main opposition Indian National Congress were big on pledges to spend billions of dollars to provide income support to the poor and farmers. Keeping that promise at a time when tax collections have undershot targets may come at the cost of India missing, yet again, its fiscal deficit target of 3.4% of GDP for this year. Global credit rating companies are monitoring the number closely and any downgrade could push the nation’s debt into junk category.

Jobs

The new government needs to find ways to productively employ about 1 million people entering the workforce every month. India hasn’t published official employment data in more than two years, but a leaked statistics office report -- which was rejected by the government -- puts the unemployment rate at a 45-year high of 6.1%. The Centre for Monitoring Indian Economy Pvt., a private research firm, estimates the jobless rate rose to 7.6% in April.

Shadow Banks

A series of defaults by beleaguered shadow financier Infrastructure Leasing & Financial Services Ltd. last year exposed fault lines among India’s non-bank lenders, which accounted for a third of all new loans over the previous three years. While Modi’s government’s seized control of the company to contain the crisis, a lingering credit crunch has curbed loans and affected consumer spending. That’s separately triggered concerns about mutual funds that hold debt issued by non-bank finance companies.

Trade

India last posted a monthly trade surplus in March 2002. Rapid economic expansion since then has meant the nation’s imports have far outgrown exports, with oil being the nation’s biggest purchase. That’s pushed the current-account deficit to more than 2% of GDP last year, making it a key vulnerability for the economy. While India is trying to narrow the shortfall by reducing its reliance on imports and boosting exports, that will prove difficult in a global environment of slowing growth and rising trade protectionism.

Investment

Fixed investments have been almost stagnant at about 30% of GDP in the past four years, while foreign direct investment has declined recently -- partly because of the uncertainty ahead of the election, but also due to politically-inspired protectionism and bureaucratic bottlenecks, which have kept investors away. India has missed out on the flow of FDI into regions like Southeast Asia as companies shift production to avoid rising tariffs in the U.S. and China. A stable government with continuity in policy and progress on reforms could boost the sentiment.

“The challenge that we are facing in sluggish private investments needs to be addressed with special attention,” analysts at Elara Capital, led by Ravi Muthukrishnan, wrote in a note. “Sticking to fiscal discipline and avoiding crowding out of financial markets, would be key to increase in private investment activity.”