Despite the prolonged economic slowdown (real GDP grew by just 4.5% year on year in July-September), the government is unlikely to implement major economic reform. Instead of unpopular economic measures, the ruling Bharatiya Janata Party (BJP) is likely to maintain its focus on popular Hindu nationalist themes as it seeks to rebound from its poor performance in recent state elections. Fiscal constraints and price pressures will preclude fiscal and monetary stimulus in the short term. Meanwhile, emboldened opposition-controlled state governments are likely to obstruct the progress of major projects backed by the central government, further undermining the country's growth potential.

The government has reacted defensively to the drumbeat of poor economic data in recent months, lashing out at critics and questioning the basis of some official reports. In response to criticism from prominent businesspeople over the state of the economy, the finance minister, Nirmala Sitharaman, warned that such rhetoric could harm India's national interest; she separately suggested in late November that India was incapable of experiencing a recession. Officials recently scrapped a government survey that showed an unprecedented decline in consumer spending between 2011‑12 and 2017‑18, arguing that the methodology was flawed.

The quality of official economic data has been criticised since 2015, when changes to GDP methodology allegedly overestimated growth during Narendra Modi's first term as prime minister (2014‑19) and underestimated it under the previous administration led by the Indian National Congress. In an attempt to bolster the credibility of official data, the government constituted a new Standing Committee on Statistics under the leadership of a widely respected former chief statistician, Pronab Sen, in December. The first committee meeting is due on January 6th.

The government will prioritise Hindu nationalism over economic issues

Rather than respond more robustly to the economic slowdown, Mr Modi and the BJP are likely to remain focused on divisive social issues that they believe will pay political dividends. Several far‑right groups, including some affiliated with the BJP, have long been pushing for India to be recast as a Hindu country. Since winning re‑election in May 2019, the government has altered India's only Muslim-majority state by revoking Jammu and Kashmir's statehood and special status under the constitution. It also won a Supreme Court ruling that cleared the way for a Hindu temple to be built on the site of a 16th‑century mosque destroyed by Hindu nationalists in 1992. New citizenship legislation, seen widely as a means of denying citizenship to Muslims who lack documentation, was enacted in December, sparking nationwide protests.

With Mr Modi strongly backing the citizenship measure in spite of the protests, the next major social measure on the government's agenda will probably be a uniform civil code. Such a measure would introduce a more progressive system of marriage and divorce, supplanting India's long‑standing practice of allowing Muslims to follow different practices.

The measure would build on legislation enacted in July 2019 that criminalised the Muslim practice of instant divorce by triple talaq—a move welcomed by advocates of women's rights but opposed by some who saw it as part of a broader BJP campaign against Muslims. While the BJP promised to implement a uniform civil code in its 2019 general election manifesto, any such move would be subject to legal proceedings; the next hearing on the issue in the Delhi High Court is set for early March.

The most meaningful reforms that are likely to be implemented in the first half of 2020 are the long-planned amalgamation of dozens of different national labour laws into four distinct measures. However, the prevalence of other strict regulations and the absence of land reforms will continue to hold back manufacturing growth. For example, a new code on industrial relations, introduced before parliament in November, retains India's long-standing prohibition on layoffs without government permission at factories with 100 or more employees.

Political changes at state level will hobble investor confidence

While Mr Modi's hold over the national government remains unquestioned, the BJP has lost control of five state assemblies since late 2018, setting the stage for greater acrimony between the government and independently minded state legislatures. To the consternation of foreign and domestic investors in infrastructure and renewable energy, the chief minister of Andhra Pradesh, YS Jaganmohan Reddy, who secured his position in May by defeating a regional party formerly allied with the BJP, has refused to honour contracts signed by the previous state government.

Investors face even more risks in the state of Maharashtra, which the BJP lost control of in late November after an inconclusive election the previous month. The uneasy new anti‑BJP three‑way coalition government has pledged to "review" Mr Modi's Japanese-financed US$16bn Mumbai-Ahmedabad bullet train. The project is opposed by farmers, who stand to lose portions of their land. The future of a US$70bn refinery envisioned by Saudi Arabia's giant state oil company, Saudi Aramco, and a collection of Indian state-controlled oil companies is also uncertain; the new state government has dropped charges against protesters who forced the project to be relocated in 2018.

The BJP is unlikely to improve its performance significantly in the state elections due in 2020. The party lost control of the mining and steel-centric state of Jharkhand on December 23rd and faces an uphill battle to defeat the anti-corruption Aam Aadmi Party in elections in New Delhi scheduled for February 2020.

Fiscal constraints preclude significant new stimulus

The government announced a slew of fiscal stimulus measures in August and September in response to weak GDP data for April-June 2019. The measures included initiatives for ailing sectors of the economy, such as automotives, banking and housing. Notably, the government also gave companies the option to pay corporate tax at a lower rate of 22% (25.2%, including various surcharges), from 30% previously. This was backdated to the start of fiscal year 2019/20 (April-March), in order to spur private-sector activity.

These measures will leave a large hole in government finances. The government will have little choice but to tolerate a level of fiscal slippage, but is unlikely to contribute further to the deficit with large new stimulus measures. With early preparation under way for the presentation in February of the annual budget for 2020/21, further fiscal measures are likely to be put on hold until then. Although reports suggest that the government is considering a moderate income tax cut (after September's corporate tax cut, which was intended to bolster manufacturing investment), the government has little scope to cut rates significantly in light of very slow growth in tax receipts. Fiscal and monetary policy constraints, coupled with an uncertain business environment in some states, will mean that the economy fails to reach its growth potential in this year and beyond.