Take Heed of India’s Post-Election Story
The recent elections in India have changed the country’s political map in ways that are of major interest to the world—and the supply chain community. For the first time in three decades, a political party in India (the Bharatija Janata party, or BJP) won a clear national mandate, winning 282 out of 543 available seats. Most Indians are jubilant, the stock market is up by 20%, and the Indian Rupee appreciated significantly.
After years of almost nonexistent economic reform under the outgoing, paralyzed Congress-led coalition government, business leaders are itching for change. Under the previous regime, the economy slowed down to a crawl, there was fiscal profligacy, and India’s gross domestic product (GDP) grew by less than 5% in the last two years compared to 9% per annum in the five years before 2008. The last five years have been marred by a deadly mix of policy paralysis, rampant corruption, bureaucratic inertia, and runaway inflation. A lack of growth-oriented economic policies led to a fall in foreign, private, and public investment, especially in infrastructure, mining, and manufacturing.
India’s new Prime Minister, Narendra Modi, has a challenging task ahead of him, but there is genuine hope that he can put the country on the right track.
During his 12 year tenure as the Chief Minister of the State of Gujarat, Modi earned a reputation as one of the nation’s most aggressive economic change-agents, streamlining the state’s notoriously obstructive bureaucracy and making much needed improvements in infrastructure. Now, there is great anticipation that Modi will do the same on a national scale to kick-start economic growth and development by fostering a more business-friendly policy environment. Perhaps India has finally elected a central government that focuses on improving the country’s infrastructure over its five year term. Infrastructure development—particularly electricity generation, railroad expansion, and road building—will be the new government’s top priorities.
The government will also strive to build a globally competitive manufacturing sector capable of creating the 10 million new jobs that are required every year. As China’s cost competitiveness continues to erode, and global corporations reduce their dependence on manufacturing in that country, there’s an opportunity to persuade foreign companies to move their production bases to India. However, this will require changes in labor laws and licensing requirements. If this is achieved, for the first time, foreign companies will be able to make direct investments in sectors such as multi-brand retailing, defense production, and insurance.
There are encouraging signs for global trade as well. The new administration wants to establish a dialogue with foreign companies and governments and find win-win solutions rather than focusing on unilateral decisions. As a result, friction on trade and investment matters should fall substantially over the coming years, and economic ties with the U.S., China, Japan, and Europe should expand.
On the downside, there are a number of potential roadblocks that could slow or even stop progress on these various fronts.
Many of the issues that have stalled progress in the past are highly contentious. Also, the new government will have to maintain a fine balance between meeting its World Trade Organization obligations and doing what’s best for local business interests.
Moreover, although the incoming government has a mandate for change, it does not have a magic wand. The economy suffers from high inflation, a huge fiscal deficit, and large welfare programs and subsidies that will be hard to rein in. Besides, India’s federal system ensures that state governments deal with key issues such as power distribution, education, and land acquisition. This could impede some major policy changes, such the introduction of a national goods and services tax (called Uniform VAT) and the reform of labor laws.
Still, India now has an opportunity to return to the path of rapid economic development if the new government is able to arrest the current downslide, grow business and consumer confidence, pick up investment, and pursue sensible fiscal and monetary policies.
The message that India and the rest of the world should take from these developments is that optimism is warranted, but euphoria is not. Watch this space for updates!