Malini Bose

On March 12, the government released economic data for the October-December period, indicating a 4.7 percent GDP expansion. The story was gloomy, showing that India’s economic growth remained below the 5 percent mark for the seventh consecutive quarter. For the first time since 1991’s liberalization reforms, India’s growth rate has dipped below 5 percent in two consecutive years.  Low levels of investment and contracting demand led to a 1.9 percent contraction in manufacturing.

On the bright side, the data revealed that there has been a slight expansion of industrial production: 0.1 percent on year in January, the first growth in four months. Retail inflation—although still significantly higher than the target—cooled for the third consecutive month to a 25-month low of 8.1 percent. In addition, output services like finance, insurance and real estate grew 12.5 percent from the previous year. For the Congress party, however, this might be too little too late.

Effect on the Election

One of the major reasons the incumbent Congress-led United Progressive Alliance is on the defensive in the upcoming election is its mismanagement of the economy over the last two years. Detractors accuse the UPA government of ineptitude in controlling inflation and the rising current account deficit, fiscal profligacy, and an inability to attract foreign funds.

The economy is expected to have a significant impact on the election. According to a study conducted by Lok Foundation and the University of Pennsylvania’s Center for the Advanced Study of India (CASI), which tracked 70000 respondents across 24 states, voters are more concerned about the economy than caste and religion. As reported in the Indian Express, the Director of the CASI, Devesh Kapur said that voters were now state-centric and that people from different caste and income groups had similar views on economic issues. The Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA), which is widely seen as a pro-business and pro-market party, is likely to have the edge as far as the economy is concerned. However, it is important to note that the economy is only one of several factors that will affect the election. As opined by Rajesh Kumar of Mint, “To be sure, there are many factors that influence voting in a diverse country like ours and by giving too much weight to economic outcomes, one runs the risk of oversimplifying matters.”

The Post-Election Economy

According to an HSBC report, normal business conditions could prevail after the elections (results will be out on May 17) and “pent-up demand should be released.” There is cautious optimism that India’s fundamentals are strong and will revive once there is more certainty in the political environment. As reported in the Wall Street Journal, Leif Eskesen, HSBC’s chief economist for India said, “As we move into the next fiscal year, we will see growth gradually pick up and move above 5 percent.” A report by India Ratings and Research is also optimistic in expecting India to grow by 5.6 percent in 2014-15, according to the Hindustan Times.

While it is impossible to predict with any certainty the outcome of an Indian election, currently the opposition BJP seems to be in the lead. Many see this as a precursor to economic recovery because the BJP is seen as a pro-business party. Being friendly to business has been a pillar of BJP Prime Ministerial candidate Narendra Modi’s campaign. According to The Economist, a national survey released on February 26 by the Pew Research Center suggests voters favour a government run by the BJP over Congress by a startling 63 percent to 19 percent.

On March 18, RBS was reported as saying: "A change of leadership and ensuing policy changes could revive the Indian economy in a similar vein to Japan and China in recent years.” According to Geoff Lewis of JP Morgan AM, “Modi is obviously a very big influence on the stock markets. I suspect that as the election draws nearer, the markets will actually run up a bit further. Clearly, investors are really hoping that there will be change in the government in India and a more business-friendly and reform-minded administration, led by the BJP, will come to power.”

However, the specter of a fractured mandate looms large. As discussed in the last issue of this newsletter, an opinion poll conducted by ABP News and Nielsen declared that though BJP may secure as many as 217 seats in the Lok Sabha, it would still fall 55 seats short of the 272 seats needed for a majority. This could result in a weak coalition government at the center, which in turn could translate into another bout of policy paralysis and stalled economic reform. Since the new government will inherit a slow growth rate, a high current account deficit and a weak rupee, it will be able to ill afford policy paralysis. According to a Moody’s spokesperson, “If a coalition of smaller, regional parties without a common economic reform agenda were to take the helm, it would likely provoke further capital flight, thereby increasing borrowing costs and weakening the Indian rupee, and delaying economic recovery.”

The next two months will be tense for investors, consumers, manufacturers and the economy at large, until it become clear what effect the election will have.