India in 2014: Elections and Economy

Q1: 2013 can hardly be called a success for the Indian economy. Growth rates slowed, and along with the financial crisis, the outflow of foreign capital from the country intensified. What are the prospects for 2014

A1: On the face of it, India’s economic woes are far from over, but a closer look tells a more nuanced story.  The country’s GDP growth has slowed to less than five percent (nearly half of what it was in 2010) and the rupee took a beating this past summer, slumping to 68Rs to $1USD.  Commercial disputes ranging from intellectual property to taxes are common, food price inflation remains high and large infrastructure projects don’t seem to materialize at the rate that investors had hoped.  A chronically energy-starved nation, India can’t seem to find enough supply to satisfy its growing middle class, or to run the businesses that would fuel growth further.  Foreign Direct Investment (FDI) into India from Jan 2013 – Oct 2013 slumped 12%.

When one looks deeper, however, the story is more complex.  Further reforms will likely take place in 2014, as India’s central bank opens the banking sector to competition and foreign retailers begin to move into large cities – both moves should create tens of thousands of badly needed jobs.   To illustrate the point, it was reported that for the 19,000 jobs available in the state run banks this year, nearly one million candidates appeared for the test.  India’s central bank will issue new licenses early in 2014, and a number of these banks are required to set up in rural areas, so the potential for both job creation and financial inclusion should increase.   The year’s monsoon was “good”, indicating that agricultural production (and exports) will help boost the rural economy as well.  

Finance Minister Chidambaram noted that India should return to a higher growth rate this year – though how high it can go is a matter of debate.  Large corporations have hinted that they are holding back on green field investments until national elections are concluded, and political stability is certain. So all in all, it appears that the economy is primed for an upward turn, but much of that depends on the results of the upcoming national election.

Q2: What led to the overall slowdown of the Indian economy? 

A2: A lack of structural reform in the economy, and a lack of leadership in the economic direction of the country.  India’s export markets have also experienced economic sluggishness, which is part of the problem, though domestic issues play a large part. There are a number of powerful political bodies that oversee the economic trajectory of the country and they have not been in agreement as to what direction the economy should take- should it be redistributive or pro-growth, protectionist or market-driven? Should it emphasize services or manufacturing for growth? How can it shift labor from agriculture into semi- and high-skilled sectors? How can the workforce be trained with the right skills to execute that transition?   None of these questions seem to have a clear answer.  Direction from the top has been muddled, and work-arounds like the Cabinet Committee on Investment (created to fast-track lagging large infrastructure projects) are only a quick-fix.  India’s institutions have not kept pace with the economic transformation that has occurred over the past 20 years, and need to be strengthened in order to spur the kind of growth India seeks in the next 20. 

Another major problem is investor sentiment, which can be assuaged by implementing policies and regulations in a predictable manner, increasing certainty.   Inconsistent tax policy and the implementation of existing laws and regulations have also played a significant role in hampering investor sentiment. 

Q3: What, in your opinion, will be the drivers of growth for the Indian economy?

A3: The next government should have a clear set of economic policies in order to kick start a period of higher growth for the economy.  Transparent and predictable regulations for the infrastructure and energy sectors should be a high priority, as should the passage of a Goods and Services Tax. 

One of the biggest opportunities ahead is the creation of industrial corridors linking some of India’s largest cities to each other via road and rail – Delhi, Mumbai, Chennai, Kolkata and a few others.  These corridors are an attempt at planning sustainable infrastructure and cities across the country, and will house large industrial complexes, around which jobs will be created, both direct and indirect.  The corridors are largely supported by state-level leaders regardless of political affiliation, and have the support of the prime ministers of both India and Japan, who are financing their development.  They have the potential to affect 180 million people, living in or near the corridors. 

Q4: It turns out the political situation was largely responsible for the economic collapse last year. How, in your opinion, will the balance of political forces change after the elections and how would this new alignment of forces affect the economy?

A4: In this 2014 election, it’s clear that India’s voters are calling for change.  For decades they have cast ballots based on community identity, but this is changing in a dramatic way.  New voters -including the young and newly middle class - are turning out to vote against corruption and, by all accounts, for good governance and economic development.  While it is hard to predict how this trend will play out on a national scale, it does bode well for better governance, which ultimately bodes well for the economy.
At this point, the economy calls for strong leadership, and the most effective way to ensure that is through either party winning an outright majority, or through a firmly aligned coalition.  Narendra Modi is viewed as a more pro-business candidate than any other, but whether he could pull off significant reforms if elected will depend on many factors, including the strength of a potential BJP-led coalition.

The prospect of a Third Front (a coalition of minority parties) is the most risky outcome of the election.  Ratings agencies have noted that the first few decisions of the new government will likely decide whether India keeps its sovereign rating, or is downgraded to junk.  Against the threat of a rating downgrade, and a further decline in investor sentiment, political parties should already be planning what they will do to ensure political stability and decisive economic leadership.

Q5: Talking about business and investors, what election results will be better for them?

A5: Many investors are hoping that the upcoming national elections will return the opposition BJP, known for its pro-business, pro-reform agenda, to power in 2014 (they were last in power from 1999-2004).  However this may be premature, because the quick reforms have already been done – it is the deeper, structural ones which need action.  Unless a strong coalition government comes together to accomplish this, it is difficult to imagine the significant economic change that many are hoping for. The party’s front man and candidate for Prime Minister, Narendra Modi, also comes with political baggage, having been in power during deadly riots which many still think he could have stopped (though he has been acquitted by the courts).

Q6: You have already talked about new electoral behavior of the Indian youth. What trends do you see in their behavior?

A6: One of the most important trends in India today is the growing political involvement of the youth and middle class.  Frustrated with the status quo which rewards only a tiny elite group, they have begun to demand change (economic and social) at the ballot box.  Recent state elections have shown that citizens are voting on issues of economic development, and are willing to accept new parties which have the potential to shake up the establishment. 

In the past two years, India has witnessed a growing resentment toward corruption and violence against women – events have triggered mass protests in New Delhi and throughout the country.  What is notable is that the protests have been driven by traditionally politically apathetic groups.  The government has tried to respond to their concerns, but implementation of real solutions or attempts at genuine dialogue have been spotty at best.  The tension between the government and a more politically involved young generation will likely increase before real change comes about.

Q7: What policy initiatives and solutions can ensure the resumption of economic growth to at least 7%?

A7: Leadership.  Whichever party or coalition comes to power in 2014, the economy needs decisive leadership.  Certainty and predictability will boost sentiment and drive investment.  7% growth may still be a few years down the road; internal economic reform and institutional strengthening are both needed in order for India’s economy to grow sustainably for the next few decades.  If the next government places an early focus on a few key economic measures both domestic and international investors would cheer.

Ms. Persis Khambatta is a Fellow with the Wadhwani Chair in U.S.-India-Policy Studies at CSIS. An earlier version of this piece first appeared in the World Economic Journal.

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