The economic fallout of Indian politics – what to expect from the 2019 elections in the light of Modi’s pledges and achievements
In May 2015, The Economist presented ‘Modi’s Pledges’, a list of major promises. Prime Minister Narendra Modi had won the election to the National Assembly the year before with a comfortable majority, but still lacked a majority in the Upper House. He stated he would need ten years and a majority in both houses to implement his far-reaching goals. He is still popular and might yet reach that goal.
India before Modi
Modi impressed his voters with his vision and by presenting himself as a doer. The leaders of the Indian Independence Movement, namely Mahatma Gandhi and Pandit Nehru, had been focusing on self-rule and self-reliance, democracy, decentralization, and a moderately socialist economic order. As a means to achieve true independence, Indira Gandhi, Nehru’s daughter, nationalized further industries and established a 'Licence Raj' (From the Hindi meaning: rule, also referring to colonial rule) and an excessive bureaucracy. By the late 1970s India was one of the least open economies. In 1977, her party, the Indian National Congress, lost control of government after 30 years. India reluctantly opened up and on larger scale in 1991 after a major foreign exchange crisis. ‘Organized trade’ (supermarkets, cash-and-carry) is still protected from international competition. Ikea was able to open its first store (Hyderabad) only in 2018.
A major slogan of Modi’s Bharatiya Janata Party (BJP) was ‘Make in India’, a reaction to the inflow of foreign manufactured goods that greatly widened Indians’ choice of quality goods. For decades manufacturing had been beset by juicy monopolies of private companies and state-owned enterprises (SOEs). Where the Independence movement had complained about the dominance of British firms, the focus shifted to multinational corporations. Now Chinese products dominate the markets: China has become the major source of imports and India’s major trading partner.
Despite the fact that India now presents growth rates that are higher than China’s, the comparison with its Northern neighbor shows the long way India has to travel to catch up. Questions as to when India might rival China as the world’s workshop still seem premature: According to the World Bank, China’s territory is three times as large as India’s (9.6 mio sq km vs. 3.3 mio sq km), the population is still more numerous (1.41 bn vs. 1.34 bn) and much richer (GDP per capita 2017: USD 8,827 vs. USD 1,940). UNIDO calls both emerging industrial economies, but China’s is four times as big (GDP USD 10.1 trn vs. USD 2.6 trn), its manufacturing value added is more than seven times of India’s (2017: USD 3.19 trn vs. USD 0.43 trn) and the share of manufacturing in GDP is twice as high (32% vs. 16%). China ranks third among 150 countries in UNIDO's Competitive Industrial Performance index (CPI), India 39th.
Industrial growth redefined
A revision of the system of national accounts helped to raise India’s dismal industrial growth rates. The main problem here is that since colonial times India distinguishes between an ‘organized sector’ of registered establishments, which use electricity and employ more than ten workers, and the much larger ‘unorganized sector’ that lacks documentation. By any standards and definition, industrial employment never lived up to the expectations: India has skipped industry and moved directly from an agricultural to a services society. This is also in line with the caste system and its tradition of a ritually determined division of labor. Nine tenths of labor is ‘informal’.
With its still weak industrial sector even a reluctant policy of liberalization resulted in a deficit in the trade of merchandise goods that is half as high as total exports (2017: USD 149 bn vs. USD 298 bn, WTO). However, there is a surplus in the trade in commercial services. Thanks to record home remittances of workers abroad (2017: USD 69 bn, World Bank) the deficit in the current account balance is still one of the largest in absolute terms (USD 49 bn), but just 2.4 percent of GDP (The Economist).
That the BJP government is more driven by political than economic or social ambitions became evident when they devaluated 500 and 1000 rupee banknotes in 2017 in an attempt to eradicate corruption. The trick worked: Shortly afterward, the BJP won the elections in India’s most populous state Uttar Pradesh. U.P., as it is commonly called, is one of the ‘sick’ (Hindi: bimar) BIMARU states (Bihar, Madhya Pradesh, Rajasthan and U.P.), with high proportions of small peasants, landless laborers and Dalits. The overwhelming majority of financial transactions are still cashbased, undocumented and difficult to tax. Banks would accept the high denomination bank notes, but only for a few days and only for those who had a bank account. However, they did not have enough smaller bank notes ready, with the result that wages and bills could not be paid. The economy was hit hard for months. Women in particular suffered, as they often keep money separate for emergencies.
Modi had promised that every Indian would have her/his own bank account and banks were advised to open accounts irrespective of deposits. Millions of new accounts were opened, obviously a prelude of demonetization.
It should be expected that Modi will concentrate his efforts on winning the coming elections for the National Assembly with a comfortable majority. But he also needs gains in the upcoming state elections in order to dominate both Houses, be in the position to change the constitution, and gain more powers for the executive. His populist Hindu nationalist policy is not directly targeting India’s largest ‘minority’ (Muslims), but concentrating on cultural practices like the slaughtering of cows, a sacrilege for Hindus. An increasing number of Muslims are reported to have been lynched by an angry mob just on the rumor of having slaughtered the sacred animal.
India has traditionally enjoyed good relations with the other Muslim states, including Palestine, despite India’s close cooperation with Israel, especially in defense technology. Such a delicate balance will be more demanding in a time when Iran-Saudi proxy wars are spilling over to Pakistan. After all, India has the second largest Shia population after Iran and India's new Shia party is seen as a Hindu divisive effort.
Additionally, the Gulf conflict presents a serious problem for India’s traditional policy of bilateralism and neutrality: Iraq, Saudi Arabia and Iran are India’s major oil suppliers; bilateral trade with Iran reached USD 13.8 bn. While Commerce and Industry Minister Suresh Patel proposed to double bilateral trade with Iran in the next five years, the US demanded they cut oil imports from Iran to zero by November 4, 2018 or face sanctions. However, at the last minute the US government exempted India together with some other countries from the embargo. In any case, Indian exports to Iran amount only to a quarter of imports. India lacks fossil fuels and is a major energy importer.
Affected are also India’s ambitions to counter China’s New Silk Road with a North-South corridor linking the Iranian port of Chabahar with Central Asia and the Russian Federation.
India’s Look East policy is making progress: The Quadrilateral Security Dialogue or QUAD can be seen as an answer to China’s Belt-and-Road Initiative and already is being termed an Asian NATO. It links up India with the USA, Japan and Australia; smaller countries like South Korea, Singapore, the Philippines and Indonesia might also benefit. The Asia-Pacific region has become the Indo-Pacific region.
A date for the national elections will be fixed by the government, expectations are that they will be conducted in March or April 2019. State elections in Madhya Pradesh, Chhattisgarh, Mizoram, Rajasthan and Telangana are being held in late 2018. Except Mizoram and Telangana, these states are ruled by the BJP. More important are elections in Andhra Pradesh, Arunachal Pradesh, Odisha and Sikkim due in 2019, possibly to be held together with elections to the National Assembly. Prime Minister Modi can be expected to concentrate his efforts on convincing the electorate to go to the polls and vote for his party. Decisions e.g., with respect to the EU-India free trade agreement, should not be expected soon.
Given Modi’s popularity and the weakness of the Congress party, it would be a surprise if he does not win. Whether he will also get a majority in the Upper House in the near future is somewhat unclear. As far as the economy is concerned, his goals are clear: market-oriented to some extent, not too liberal and with a solid role for state owned enterprises.