India's election surprise: What went wrong for Modi and what comes next

Prime Minister Narendra Modi was dealt a major setback in India's general election, with his Bharatiya Janata Party set to lose its majority in the lower house of parliament.

Modi has said he'll remain in office for a third term, but the BJP will likely be forced into a coalition government for the first time since it came to power a decade ago.

That leaves Modi and the BJP politically diminished after losing ground to a revived opposition bloc that successfully wrested territory with a campaign focused on economic issues.

What happened in the Indian election?

After a marathon six-week election, initial results showed that Modi's BJP failed to win the necessary 272 parliamentary seats needed to form a government on its own.

An alliance of more than 20 opposition groups led by the Indian National Congress gained ground in a number of key constituencies. The BJP's coalition, known as the National Democratic Alliance, appears to have still crossed the majority mark as a bloc, but without an outright majority of its own, the BJP will have to govern with partners for the first time since Modi came to power in 2014.

The election result was a shock outcome after exit polls three days earlier predicted a landslide win for the BJP-led coalition, although anecdotal reports in recent weeks had highlighted the possibility of the ruling party losing support, especially in strongholds like Uttar Pradesh state.

What comes next?

Modi has vowed to continue as India's prime minister despite his party's loss of its majority.

Under India's parliamentary system, if a single party fails to capture a parliamentary majority, then the party with the most votes will look to form a coalition government.

Modi's alliance is made up of a number of partners, some more shaky in their allegiance than others.

If Modi fails to win enough support to return as prime minister, they could demand a different leader or defect to the opposition, throwing the country's leadership into question — though there aren't indications that's likely to happen.

For much of India's post-independence history, coalition governments were the norm, and such governments have been credited with producing noteworthy achievements, such as the opening of the Indian economy in the early 1990s.

What went wrong for Modi and his party?

The BJP's campaign relied heavily on the fulfillment of Hindu-nationalist pledges and on Modi's personal brand.

It failed to enough traction among voters worried that the economy — while among the world's fastest-growing — isn't delivering benefits evenly to all. Issues such as high unemployment, especially among the youth, and the rising cost of living, weighed heavily on voters going into the election, according to polls.

A newly energized opposition hammered on these bread-and-butter issues to the detriment of the ruling party. Meanwhile, some analysts said the BJP's overly ambitious election target of 400 seats with its allies likely backfired, prompting some supporters not to bother turning out, and raising fears the ruling party would use its super majority to reduce affirmative action policies for some minority groups.

Despite Modi campaigning heavily in the southern states, the BJP also failed to make inroads there, with the party's pro-Hindu message failing to gain traction.

What does this mean for India?

Many of the BJP's alliance partners don't share the fiery pro-Hindu views that are core to the BJP agenda.

That means that the BJP could be forced to dial back harsh rhetoric and set aside ambitions to more aggressively reshape India into an overtly Hindu nation.

It may also force the BJP to offer cabinet posts and other concessions to alliance partners. On the economic front, a BJP-led government will likely continue to pursue its business-friendly policies, but a weakened mandate means it may struggle to enact ambitious reforms around labor and land rules, which economists say are necessary to keep growth going.

To shore up support, a BJP-led government may be tempted to turn to populist spending measures, putting its fiscal plans at risk.

What does this mean for the rest of the world?

Under Modi, India's profile on the world stage has grown significantly, helped by its robust 8%-plus rate of economic growth and a young and growing population that makes it a draw for foreign businesses.

Modi has sought to cultivate a deeper partnership with the US, which sees India as a critical counterweight to China, while also maintaining strategic independence that has seen it refuse to join the West in condemning Russia over its invasion of Ukraine or shun its oil exports.

Analysts don't see those positions likely changing anytime soon. The same goes for Modi's ambitions to make India a global manufacturing hub and continue luring foreign investors on the hunt for the next growth story as China's economy slows.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.