An Election Day Stunner in India

How Governmental Change in India May Affect the Global – and US -- Economy

An Election Day Stunner in India
May 23, 2014

The result was increasingly inevitable, but the degree was stunning. Parliamentary election results in India, released Sunday, May 18, revealed a massive rebuke to the Congress Party, which has ruled India since its independence in 1947. The combined leadership of the Nehru/Gandhi lineage has given way to the conservative Bharatiya Janata Party (BJP) and its leader, newly elected Prime Minister Narendra Modi.

Cobbling together a curious combination of pro-business and youthful voters, the BJP managed to take 282 seats in the Lok Sabha (lower house of Parliament), grabbing an outright majority of the 543 seats – the first time any party has done so since 1984. Along with coalition allies, 334 seats are now under BJP control.

Meanwhile, the scandal-ridden Congress Party claimed only 50 seats under the leadership of Rahul Gandhi, the grandson of Indira Gandhi, who by multiple accounts ran an oddly dispirited campaign. They will now be forced to the sidelines as the BJP exerts its power – and that is exactly what analysts are expecting the BJP to do.

Modi ran on a business-friendly campaign platform, promising bureaucratic reforms and an emphasis on economic development. Among the more concrete promises was to repeal legislation from 2012 allowing corporate taxes to be retroactively applied.

His track record as the chief minister in the state of Gujarat suggests he will indeed follow through with economic reforms. In his years there, he established an effectively regional free-market economy, luring larger companies such as Ford to locate facilities in the area.

On the mere expectation of BJP victory, the Indian stock market has been on a fierce rally, rising almost 14% from February 2014 to the mid-May election announcement and 29.5% since last August. According to Forbes, in the past six months, foreign investors have purchased over $16 billion in Indian bonds and equities, comprising a 22% ownership stake in the cumulative stock listings in Mumbai.

As India is the world's population leader and the largest democracy, as well as Asia's third largest economy, Modi and the BJP have the capability to alter the world's financial landscape dramatically. Clearly, the investment community is betting that Modi will deliver, and is backing up their belief with investment capital – but what is the likelihood that he will do so?

The celebration will be winding down soon, and sober realities will begin. Modi has a huge challenge ahead in reforming systemic corruption and bureaucracy that has plagued the Indian economy for decades. While his legislative challenges are tempered by the BJP majority in the lower house of Parliament, the upper house may be a source of delays and roadblocks.

Even if Modi succeeds with legislation and the cutting of red tape, it is going to take some time for the positive effects of economic reforms to affect the majority of the population.

He could do well by reviving many of the stalled and dormant building and infrastructure projects. The 2008 global crisis with respect to credit resulted in literally thousands of projects being stalled, delayed, or abandoned outright. Restarting these projects wisely and efficiently could provide immediate dividends, both economic and political.

How long will the honeymoon last, and are expectations so high that partial failure seems inevitable? Democracies can turn on incoming officeholders with extremely high expectations, as President Obama can verify. It will be important for Modi and the BJP to show progress quickly – or at least give the impression of progress.

Otherwise, tension is likely to rise sharply. Modi's moderate campaign largely muted concerns of India's Muslim population who remember the 2002 religious riots in Gujarat that killed many Muslims – and failure to deliver on economic reforms may reopen simmering fault lines between Hindus and Muslims.

Meanwhile, assuming Modi succeeds, India could provide a kick-start to international trade. With their massive infrastructure needs, US firms catering to that market could thrive.

Gunjan Bagla, the founder of Amritt Ventures, a consulting firm on investments in India, suggests that India could rise from the eleventh-largest trading partner with the US to the top seven within five to six years. Forbes predicts that this may come at the expense of a slowing Chinese economy.

In any case, change has arrived to India. Let's see where it leads us.

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