Time running out for Modi's "Make in India"

When Narendra Modi won a landslide victory in the general elections in May 2014, expectations were high that after decades of undecidedness and stalemate, a strong and market-oriented government would drive through overdue reforms, opening the economy to foreign investment and allowing more competition. Such hopes were disappointed soon. However, he succeeded in introducing the Goods and Services Tax (GST) and creating a market, unobstructed by internal trade restrictions.

In the 2014 general elections to the Lok Sabha, the House of the People or Lower House of Indian Parliament, Narendra Modi and his Bharatiya Janata Party (BJP), often described as Hindu nationalist, had campaigned on a programme of nationalism and development. After more than 30 years of weak coalitions and minority governments, a party finally won a clear majority. Hopes that he would start with a liberal economic agenda, however, were disappointed soon. Changes were less dramatic than hoped for, described as ‘symbolic’ only, like the disbanding of the once powerful Planning Commission. The common explanation of his unspectacular start was that for his reforms he would need the majority also in the Rajya Sabha, the House of the States or Upper House, where the main opposition, the Indian National Congress (INC) and allies, still have the majority. Modi, thus, had to be careful not to alienate the electorate, before starting his reform programme that – according to him – will need ten years or two legislatures to put into practice.

In the election of New Delhi’s State Assembly in February 2015 the BJP was expected to win most seats, if not the majority. Instead, Aam Aadmi, the new party of the ‘common man’, took 67 out of 70 seats, and the BJP only three. The INC, until then ruling New Delhi, could not win even one seat. There were many explanations for the outcome: elections in India are often antiincumbent and always very personal. Aam Aadmi had contested the New Delhi elections already in December 2013 and finished second behind the BJP. As the BJP could not muster enough support for a coalition government, an Aam Aadmi minority government was installed, tolerated by the INC.

The new Chief Minister Arvind Kejrival, however, gave up after six weeks when he saw no chances to realize his programme. A main stumbling block was the admission of ‘multi brand’ shops. Foreign direct investment in retail trade was allowed in 2011, but soon the government retracted from its position. The reason is that retail trade in India is characterized by the ‘unorganized trade’ of millions of small shops and street vendors, reflecting the country’s pronounced system of division of labour, often on caste lines. As a result, the highly labour intensive services sector commands an unusual high share of GDP since colonial times.

In India, employment in the tertiary (services) sector has always been much higher than in the secondary (industry) sector. Foreigners were allowed to set up ‘single brand’ shops. They can be found, however, only in few places, like the new shopping malls. ‘Multi-brand’ supermarkets, retail chains, cash and carry markets and department stores are called ‘organized’ trade. If admitted, a certain share of local content is required (which explains why IKEA has such a slow start in India). Whereas the BJP is commonly believed to be especially strong among the trading community, Aam Aadmi presented´themselves as defender of the ‘small people’ like the shop keepers and rickshaw drivers. When he realized that he could not drive through his policy, Kejrival resigned.

The results of the general (national) elections were out in May 2014. Rather than announce the date of the Delhi election quickly, Modi waited. They took place only in February 2015. By that time the new national government had lost momentum. On top of it, Modi missed to announce a popular candidate. The next state elections took place in Bihar in October/November 2015. A coalition of left leaning parties around the Janata Dal (United) had been ruling since 2005. With a population of over 100 million, Bihar is one of the most populous Indian states, a cradle of Indian civilization. Prosperous at the time of independence, Bihar fell back to become one of the ‘sick’ (Hindi: bimar) BiMaRU states: Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh. Modi took great pains to secure a victory, but despite encouraging polls, his BJP-led National Democratic Alliance (NDA) suffered a heavy defeat. A Grand Coalition of Janata Dal, Rashtriya Janata Dal and INC won by a big margin.

The Challenge of ”Make in India“

In the last national election they won only 50 per cent of votes and 60 percent of seats. Regional parties are gaining importance, especially in the south and east. There will be no further state elections until 2017 (Goa, Manipur, Punjab, Uttar Pradesh and Uttarakhand). Elections in Gujarat, Himachal Pradesh, Karnataka, Mizoram, Nagaland and Tripura are due in 2018. Other than the Lok Sabha, where members are chosen by direct election from territorial constituencies by simple majority (first-past-the post), the Rajya Sabha consists of twelve members nominated by the President, having practical knowledge in respect of literature, science, art and social service.

The others, not more than 238, representing the states and union territories, are elected by the Legislative Assemblies in accordance with the system of proportional representation by means of the single transferable vote. One third of the members retire every second year. Elections of June 2016 brought gains for BJP, but no majority. The impact of the recent regional elections will be minimal. Modi and his NDA cannot hope to win a majority in the Rajya Sabha before the legislature ends in 2019. Thus, they will not be in a position to drive through automatically all programmes considered necessary for ambitious programmes, like the revision of the land law.

In certain instances, however, like the much discussed new general Goods and Services Tax (GST), they could win support from regional parties like the TC in West Bengal or the AIADMK in Tamil Nadu. In order to consolidate his powers, Modi is expected to concentrate his efforts on the elections in Uttar Pradesh, India’s largest state with a population of more than 200 million, in 2017 and the national elections in 2019. In a country where still two thirds of the population live in rural areas, his chances greatly depend on agriculture and the monsoon rains, on keeping the inflation low and on providing employment and income.

The ‘organized’ sector comprises only the larger (registered) firms and government services. Nine tenth of the economy is ‘unorganized’ and employment ‘informal’. It is a dual labour market, where subcontracting mostly goes unaccounted. India has a tradition of substantial deficits in the trade of merchandise goods, funded by the home remittances of Indians working abroad and a surplus in trade in (IT-enabled) services. Only 12 percent of GDP are contributed by manufacturing industry. Its output is just one eighth of China’s. Despite a rapid opening of the economy, especially in the last decade, India’s share in world trade is not more than at the time of independence.

Fitch, a rating agency, reports ‘the industrial recovery continues to be weak and fragile ... the external sector remains a worry’, but is ‘upbeat on the rural economy’. On the home front BJP hardliners demanded the ousting of Raghuram Rajan, the successful Governor of the Reserve Bank of India, who has been criticized for his tight money policy. He has left the office at the end of the term in September 2016 and returned to academia. Even though, his successor is following the same policies. This remains to be challenging to put ”Make in India“ into practice.

All in all, the trend of national parties losing ground continues. The impact of regional elections was minimal.

Dr. Wolfgang-Peter Zingel

Dr. Wolfgang-Peter Zingel, Associate Member, South Asia Institute of Heidelberg University