India's Electoral Integrity Risks and Market Stability: Navigating Governance Challenges in a Polarized Political Landscape

India's 2025 general elections, held in a deeply polarized political environment, have underscored the complex interplay between electoral integrity, governance risks, and foreign investor confidence. While the country's economic fundamentals remain robust-projected to grow at 7.2% in FY2026, per the Asian Development Bank- the political landscape has introduced uncertainties that could test the resilience of its markets. For foreign investors, the challenge lies in balancing India's long-term growth potential with the short-term risks posed by governance vulnerabilities, electoral integrity concerns, and geopolitical tensions.

Electoral Integrity and Governance Risks

India's 2024 general elections, conducted in seven phases, were marked by logistical complexity and a slight decline in electoral integrity, particularly in adjudication and perceptions of election management. A critical concern emerged from a 2023 legal change granting the executive significant influence over appointments to the Election Commission of India (ECI), raising questions about the body's independence. This development, coupled with the rise of disinformation campaigns and the misuse of money in politics, has eroded public trust in the electoral process. According to the Electoral Integrity Project, such challenges are not unique to India but reflect broader global trends where financial influence and misinformation threaten democratic norms.

The phased election model, while historically effective in managing India's vast logistical demands, has also created opportunities for regional disparities in voter turnout and access to polling stations. Critics argue that these disparities could exacerbate existing political polarization, particularly in states like Bihar, where upcoming elections in 2025–26 are expected to shape policy continuity in critical sectors like agriculture and infrastructure.

Foreign Investment in a Polarized Climate

India's foreign investment landscape in 2025 has been shaped by both risks and resilience. Despite a reduced majority for the BJP and the formation of a coalition government, Prime Minister Narendra Modi's continued leadership has provided a degree of stability. However, the slower pace of market-friendly reforms has introduced unpredictability for investors. For instance, the U.S. imposition of 50% tariffs on select Indian exports-linked to trade ties with Russia-has complicated Modi's "Make in India" initiative. In response, India launched a 100-day reform plan to simplify tax structures and attract investment, signaling a commitment to addressing structural bottlenecks.

FDI inflows in FY2025 reached $81 billion, though net inflows were a modest $353 million due to large private equity exits and Indian companies' overseas investments. This highlights the dual-edged nature of India's investment climate: while the country remains a magnet for capital, protectionist measures-such as localization requirements and high tariffs-continue to hinder integration into global supply chains. The introduction of a new Bilateral Investment Treaty aims to balance investor protections with regulatory flexibility, but its success will depend on implementation.

Geopolitical and Market Volatility

Geopolitical tensions have further complicated the investment outlook. The May 2025 Indo-Pakistan military conflict initially triggered a 1.4% depreciation of the Indian rupee and a negative equity market performance. While equities rebounded within a week, the rupee's recovery lagged, reflecting divergent market reactions to geopolitical shocks. Similarly, China's WTO complaint against India's electric vehicle subsidy program in October 2025 signaled resistance to India's manufacturing ambitions. These events underscore the vulnerability of India's markets to external shocks, even as the country diversifies trade partnerships with the EU, Japan, and the UK.

Mitigating Risks: Reforms and Strategic Alliances

India's proactive approach to mitigating risks includes strategic realignments and domestic reforms. The government's push for trade agreements with the EU and Japan, alongside its PRAGATI platform for fast-tracking governance, demonstrates a commitment to improving transparency and efficiency. Additionally, India's economic resilience-bolstered by tax cuts, subdued inflation, and strong domestic consumption-provides a buffer against political uncertainties.

However, structural vulnerabilities persist. Inadequate infrastructure, fiscal deficits, and a weak business environment remain red flags for foreign investors.

The Carter Center's emphasis on unimpeded election observation and transparency-principles enshrined in the Declaration of Principles for International Election Observation-could offer a framework for restoring investor confidence. Without robust safeguards against voter suppression and misinformation, governance risks will continue to loom large.

Conclusion

For foreign investors, India's 2025 electoral cycle and governance challenges present a paradox: a nation with formidable economic potential but a political environment prone to polarization and uncertainty. While India's reforms and strategic partnerships offer hope for mitigating risks, the independence of its election management body, the pace of policy implementation, and the management of geopolitical tensions will remain critical factors. Investors must adopt a nuanced approach, balancing optimism about India's growth trajectory with vigilance regarding governance risks. As the country navigates this complex landscape, the interplay between electoral integrity and market stability will define its attractiveness to global capital.