U.S.-India Insight November 2016: Are We Entering A Dead Zone for Reform?

November 29, 2016

Political pundits are eagerly anticipating next year’s legislative assembly elections in Uttar Pradesh, Gujarat, Goa, Himachal Pradesh, Manipur, Punjab, and Uttarakhand. Coming just after the halfway mark in the Modi government’s five-year term, elections in these states are seen as important mid-term referendums. The proximity of the elections has triggered fresh utterances of the common refrain that the policy reform process is paralyzed for a year ahead of key elections. Though this makes for a compelling premise, recent history tells us that it holds little truth in practice, particularly on issues important for the U.S.-India relationship.

Politics is a serious game in India. Finding a platform that appeals across important divisions like caste, religion, gender, and socioeconomic status means that there is a very wide range of groups that must be appeased. Economic reforms, and taking steps to strengthen the security partnership with the United States, are often viewed by pundits as important for India’s future yet potentially harmful at the ballot box. Thus, the idea that politicians are unwilling to initiate progress in these areas ahead of a national or key state election is treated as a maxim of political life.

Looking back over the last three national elections (2004, 2009, and 2014), however, it is apparent that sitting governments have actually been quite willing and able to take important decisions on “politically charged” issues in the year leading up to a national election. This includes tackling issues of particular importance to the United States, such as liberalizing foreign equity caps in sensitive areas like retail, defense, telecommunications, and media, but also in deepening security cooperation through significant agreements.

• January 12, 2004—Next Steps in Strategic Partnership: The United States and India announced the first steps to initiating trade in hypersensitive sectors, including civilian nuclear activities, civilian space programs, and high-technology trade, as well as an expansion of discussions over missile defense. http://bit.ly/2dGfARi
• January 28, 2004—Press Note 1: Liberalized multiple sectors for greater foreign direct investment (FDI), including petroleum exploration, gas pipelines, and media. http://bit.ly/1HF6tUC
• March 5, 2004—Press Note 2: Increased the foreign equity cap in banking services to 74 percent. http://bit.ly/2dTZuSp

• July 9, 2008—Nuclear Safeguards Agreement/Confidence Vote: India submitted the Safeguards Agreement to the International Atomic Energy Agency (IAEA), triggering the Communist Party’s withdrawal of support to the coalition and a confidence motion that the United Progressive Alliance (UPA) government barely survived.
• January 14, 2009—Press Note 1: Raised foreign equity limits in newspapers and magazines. http://bit.ly/2dGii9a

• August 22, 2013—Press Note 6 of 2013: Increased foreign equity restrictions in a wide range of sectors, including defense, telecommunications, asset reconstruction companies, and credit information companies, among others. http://bit.ly/1SFNakt
• August 22, 2013—Press Note 5 of 2013: Eased a number of restrictions governing foreign investment in multi-brand retail. http://bit.ly/1Ufxwjj

Reviewing the list above, it is quite clear that a sitting government feels far less constrained in policymaking than is widely believed. The introduction of the Nuclear Safeguards Agreement in July 2008 was particularly significant, nearly leading to the Congress-led UPA coalition losing control of the government.

It would be dangerous to contend that any reform is possible in the year leading up to an election. Key reforms in areas such as reducing subsidies, easing restrictive labor laws, or expediting land acquisition processes may be significant enough as to be considered dangerous political territory. But the issues that are most important to U.S. interests—namely, market access liberalization and stronger security ties—are not actually seen as harmful by sitting governments.