Before the results of India's election became clear this week, Prime Minister Narendra Modi was widely seen as a charismatic, popular strongman who was praised by the business community for making the country more relevant, even as he failed to solve the difficult problem of how to translate rapid economic growth into badly needed jobs.
After the election, Mr. Modi finds himself in an uncomfortable new position, staring at the same giant puzzle: an electorally punished party leader and forced to form a coalition to stay in power.
Mr. Modi's mandate to govern will likely be constrained by the complex problem of keeping coalition partners on side. He was unable to solve India's deepest economic problems when he had monopoly on power. Now he is a weakened leader who must balance further interests with no clear steps yet to improve living standards.
“The sense is that job growth has been weakening for the last four or five years,” said Arvind Subramanian, a former chief economic adviser to the Modi government and now a senior fellow at the Peterson Institute for International Economics in Washington. “How do we create more jobs? That's really India's major economic challenge, but I think the government has relatively limited tools at its disposal.”
The humiliation for Mr. Modi's party echoes in part public frustration that India remains a country of economic crisis for hundreds of millions of people and marked by staggering wealth disparities. In big cities, five-star hotels boasting lavish spas overlook slums without running water. In rural areas, malnutrition is rampant under many homes and families struggle to find the money to send their children to school.
India has a working-age population of roughly 1 billion but only 430 million jobs, according to the Centre for Monitoring the Indian Economy, an independent research organisation in Mumbai, and most of those who are considered employed are in precarious situations as daily wage earners or farm labourers, without stable wages or government workplace protections.
From the high-rise apartment buildings that fill the skyline to the air-conditioned shopping malls and luxury cars on the roads, improving lives are evident in many cities. But the benefits are concentrated in a small area. Professionals working in technology centers in southern India and around the capital, New Delhi, have enjoyed the greatest advances. The country's burgeoning auto industry is a source of relatively well-paying jobs.
Tycoons such as Gautam Adani, one of Asia's richest men, have bolstered their business empires through their ties to Prime Minister Modi and his willingness to eradicate regulations that would prevent them from growing wealthy.
But most Indian workers are effectively stuck in the so-called informal sector, working at roadside stalls, small shops or mobile vendors, with no guaranteed income or chance for advancement.
The failure of economic growth to generate more jobs is a major reason India missed out on the manufacturing boom that has swept across East Asia in recent decades, as factory wages lifted hundreds of millions of people out of poverty, from South Korea and China to Thailand, Indonesia and Vietnam.
The main reasons India has been unable to join this transformation are its historical emphasis on self-sufficiency, its neglect of international trade, and stagnant bureaucracy that has hindered investment.
“An entire manufacturing industry has bypassed India,” said Subramanian, the economist. “What continues to plague India is a larger failure of development.”
Mr. Modi has worked to bolster manufacturing and boost exports. His government has streamlined regulations and improved ports. But despite high-profile moves such as Apple moving some iPhone assembly to India, manufacturing still accounts for just 13% of India's economy, according to World Bank data, lower than it was a decade ago when Mr. Modi took office.
Foreign money has flowed into India's stock market, sending shares soaring – a key component of Modi's pro-business image. But persuading international investors to invest directly in Indian companies – a riskier bet – has been tougher. Modi's Hindu nationalist party has demonised Muslim minorities, a source of social unrest and raising fears of instability.
The election could also further discourage additional investment because it is likely to make it harder for Modi to pass stalled reforms wanted by businesses, such as laws making it easier to accumulate land and hire and fire workers.
With no clear path to revitalizing the economy and a tough political climate, Modi may turn to an old trick to shore up his support base: expanding social welfare programs and tapping government coffers to hand out more cash to struggling communities.
Such policies could reduce funding for the government's signature plan to aggressively build highways, ports, airports and other infrastructure that is central to a broader campaign to sustain India's strong economic growth and boost investment in manufacturing.
Some worry that the pursuit of short-term political benefits through spending could undermine longer-term plans to boost jobs through industrial development.
“We need to ensure that the benefits of economic development reach the largest number of people,” said Shumita Deveshwar, chief India economist at London-based forecasting and consulting firm Global Data TS Lombard. “If people remain dependent on welfare and don't get to reap the benefits of economic development, then it basically creates stagnation.”
Geopolitical shifts appear to be giving India new opportunities to expand its manufacturing base. As the US and China are locked in a trade war, multinational brands are looking to reduce their over-reliance on Chinese factories to manufacture their products. Large retailers like Walmart are increasingly looking to India as an alternative manufacturing location to China.
But capturing that potential investment will require continued improvements to highways, rail networks and ports, as well as a focus on job training to give people the skills they need to work in factories.
Even before the election, doubts had been raised about whether the Modi government was moving quickly enough to deliver these gains.
“Geopolitically, India is a counterweight to China and some investment will continue to flow in,” Deveshwar said, “but the scale at which India has prepared the ecosystem for these opportunities is not there yet.”
