In the current slow growth environment, India’s economy will likely continue to feel the downward pressure being exerted by high interest rates and a more challenging global liquidity environment that has negatively impacted foreign capital flows into the country. Despite the challenging short-to-intermediate-term outlook, there are a number of internal dynamics, such as favorable demographics, improving labor productivity, and the potential for tremendous growth in domestic consumption, which provide the opportunity for more robust growth in the future. At the same time, factors such as fiscal and current account problems, widespread supply-side challenges, inefficient government, and high levels of corruption are strong headwinds to improving economic growth in the country. Upcoming elections in April and May of 2014 provide an opportunity for Indian voters to voice their support for change, and could turn the tide in favor of unlocking the country’s economic potential.
In 2009, the United Progressive Alliance (UPA), a political coalition led by India’s Congress party, won the national elections by a large margin. This created expectations that India was beginning to break its historical mold and move away from its divisive caste-based and populist politics of old. Expectations were quickly shattered, though, as a series of damaging political scandals exposed the UPA, and more broadly speaking, the Indian political system, as a dishonest, dysfunctional institution. The scandals crippled the coalition government and have effectively paralyzed the political system, making it all but impossible to pursue much-needed reforms. Not surprisingly, the growth deceleration seen in the country over the last several years has resulted in a loss of popularity for the Congress-led UPA, not only from the business community, but also from the population at-large.
Fast forward to today, where Narendra Modi is the leading candidate to be elected prime minister in the upcoming general election. Modi hails from the India People’s Party (BJP), and has a strong reputation as a reformer from his tenure as governor of Gujarat. The economic transformation seen during his time in office has been impressive, and his campaign platform is built on making India a better place to do business. Modi has been climbing in the polls recently, and it now appears likely that the BJP will be able to win more than the 210 seats needed in the Lok Sabha Indian parliament to put together a strong coalition government.
The job ahead of Modi does not look particularly easy given the governance challenges inherent to turning around an economy as deeply troubled by political forces as India’s. However, there is a sense that the average Indian citizen is very tired of the present state of affairs and Modi may be able to use that political capital to improve governance, transparency, investor confidence, and ultimately growth in India. It is worth noting that Indian asset markets have cheered Modi’s recent surge in the polls.
There is no doubt that there are considerable challenges to overcome in India, and the pace of change is not likely to be quick. Yet if Narendra Modi and the BJP are able to form a strong coalition in May and begin the process of implementing meaningful reforms, economic prospects could improve dramatically, spurring domestic growth and attracting much-needed foreign capital.
