We are currently in the midst of the largest democratic election process on earth. Almost 815 million Indian citizens are going to the polls to cast their vote in the general elections. Indian elections take place during nine days of polling over a six-week period, after which all votes will be counted on May 16. The voters are hoping for a change in the ruling party in order to give India the chance to develop and offer a better life for its people.
The last ten years have seen a general lack of direction in Indian politics. Although the current government endorsed several reforms during its first term, a much-needed second wave of reforms was never implemented. A decade ago, India was oftentimes mentioned in the same breath as China and its economic miracle. However, India’s opaque politics, including corruption and lack of cooperation, has hindered its ability to move forward. The country that once was thought to offer so much promise has failed itself and its people.
India has been torn between the forces of progress and stagnation. On the one hand, the country has a young population, a large consumer base, enormous entrepreneurial spirit, and has improved its social systems. On the other hand, the country has inequality on an unprecedented scale, ramshackle infrastructure and near-constant electricity blackouts, all highlighted by corruption reigning in the expansive and complicated government system. Although the country is committed to the democratic process, its government seems unable to implement reform and has largely failed the poverty-stricken majority.
The Indian National Congress party (Congress party) has ruled the country for the majority of its independent life, and unfortunately reforms have not been implemented at a sufficient pace and corruption remains widespread. Growth levels have fallen by half and are no longer high enough to provide opportunities for the millions of young Indians joining the labor force each year.
Over the past year, these impediments have weighed on the country’s growth. However, the hope of a better future brought on by the favored candidate, Narendra Modi, has recently boosted confidence in the economic and political strength of the country, both domestically and internationally. Modi is the prime ministerial candidate of the Bharatiya Janata Party (BJP), the other main political party.
This week we will take a look at the Indian political landscape, the current election cycle and how the political system has brought the country to its current condition. We will pay special attention to the expected winner, Modi, with regard to both his political platform and history of governance in his current post. We will conclude by looking at the possible ramifications of his win.
Political History
The British Indian territories gained independence in 1947 following approximately 150 years under British rule. Previously, India had been ruled by a relatively small group of outsiders without a serious indigenous resistance. The British Empire used a “divide and conquer” method to play different power centers against each other. Interestingly, India still uses much of the legal system set in place by the British government. India is a diverse country on many levels, economically, culturally and religiously. After independence, the region was partitioned into India and Pakistan. Ever since, the two countries have been in near-constant conflict over religion as India is majority Hindu while Pakistan is majority Muslim. Both countries have also fought over Kashmir, a region that both countries claim as their own. Even after the split, about 13% of the Indian population is Muslim.
Additionally, India separated from Britain at the height of Britain’s socialist experiment. Two years before India’s independence, Clement Attlee, head of the Labour Party, defeated Winston Churchill in a general election. Attlee implemented the party’s social democratic program, nationalizing key industries and creating a welfare state. These policies caused economic stagnation. In response, Britain’s economic system was aggressively liberalized under the direction of Margaret Thatcher. Thatcher’s policies emphasized deregulation, flexible labor markets, privatization and diminished power of the trade unions. Unfortunately for India, the country established its independent policies with the British socialist framework and has not had a Thatcher-like political figure to change the country’s course toward capitalism. Modi is seen as the agent of change toward capitalism and free markets, much like Thatcher in the U.K.
(Source: www.worldofmaps.net)
The map above shows the regions of India. Although the opinion polls are notoriously unreliable, the BJP is widely expected to win close to majority of the parliamentary seats. If a majority is not achieved, the BJP has indicated that a number of other parties have shown interest in forming a coalition.
Politics in Independent India
The ruling party of India is the Congress party, led by President Sonia Gandhi. The Congress party has been in power for 49 out of India’s 67 years of independence, and can be seen as the party of the Nehru-Gandhi family dynasty. The party leaders have been dynastic, regardless of their political abilities or track record of the family members. Generally, the party lacks a unified political vision and has relied on its leaders to set priorities.
The current prime minister, Manmohan Singh, although a respected economist, has been widely viewed as a puppet for Sonia Gandhi. He is now in his eighties and is not running in these elections. He has been the prime minister since 2004 and although his government initially administered some reforms, the reform cycle was never finished. Additionally, his government has faced a number of corruption charges and has seen several terrorist attacks. The Congress party has made improvements in the social system, but has ignored the need for economic growth to fund these social reforms. Additionally, as the young population of India matures, the labor force is expanding at a rapid pace. It is estimated that since the last election cycle in 2009, the voting population has expanded by about 100 million people. In order to keep a labor market in balance, an economy has to expand by at least the rate of new workers entering the labor force.
The Congress party’s candidate to the prime ministerial seat is Rahul Gandhi, the son of the assassinated ex-prime minister Rajiv Gandhi and President Sonia Gandhi. His grandmother was Indira Gandhi, the second longest serving prime minister of India. Thus, he comes from a long line of political leaders and is the heir apparent to the party leadership role. He was raised in India, schooled in England and has worked for corporations in Mumbai. He entered politics as the leader of the Youth Wing of the Congress party. He has not had a chance to demonstrate considerable political aptitude, and his political track record has been tainted with accusations of corruption.
Enter Narendra Modi
Gandhi’s personal and political backgrounds come into sharp contrast with his main political rival, the Bharatiya Janata Party (BJP) candidate, Narendra Modi.
Modi was born in the state of Gujarat and is now chief minister of Gujarat, the western-most state of India and bordered by Pakistan. The third child of a family of six children, a son of a tea seller, he helped his father sell tea at a train station at an early age. As a teenager, he ran a tea stand with his brother. His marriage was arranged by his parents when he was 13 and he was married at the age of 18, and remains married today; however, he and his wife are estranged. This would not be such a point of interest had Modi not declared his status as “single” in the past four rounds of state elections. His estranged wife confirms that they separated very soon after getting married. It is not clear why he lied about his marital status and has never mentioned the marriage before. The concern is that when one lies about small things, it questions one’s integrity with regard to larger issues.
Modi first became active in politics during his twenties and has spent his political career with the BJP, holding various positions including head of the student wing of the party, General Secretary and National Secretary. He has been in charge of Gujarat since 2002, where his party has been in power longer than any other government. Modi has pushed for reform, emphasizing the importance of development. His state government policies have included extensive privatization in infrastructure and services and a reduction in labor and environmental regulations. This is where the comparison to Margaret Thatcher lies.
Although he has enjoyed many successes on the economic front, Modi’s political career has also been shadowed by accusations of Muslim-Hindu violence. In February 2002, a train carrying Hindu pilgrims was set on fire in Modi’s state of Gujarat. This incident was seen as an attack on Hindus and sparked anti-Muslim riots across the region. Some analysts have indicated that a high level of state involvement was suspected in the incident. Modi was cleared of initiating the violence, while other members of the administration were accused of giving the rioters lists of Muslim-owned properties. One member of the BJP, associated with Modi, was sentenced to 28 years in prison.
Despite the religious controversy, Modi has demonstrated his ability to run a local government. His policies have focused on improving living standards for everyone, so he has been accused of ignoring the political minorities. However, his supporters point out that the poverty rate for rural Muslims is the lowest in Modi’s state of Gujarat.
Modi’s background in running a local government before running for national office is also new on the Indian political landscape. He is an extremely charismatic leader and has shown considerable political foresight. His campaign has been run in a very deliberate manner. He started meeting with corporate leaders and sponsors a couple of years before the election. This is common practice in the U.S.; however, in Indian politics, where the campaigns are centered more on the political party rather than the candidate himself, such practice is unusual. It has happened in India that a party has run in the elections without a specific candidate for the seat. Modi’s campaign centers on him, with campaign sponsors specifically supporting him rather than his party.
The BJP
Modi and the BJP, in general, describe themselves as following the ideology of “integral humanism.” This ideology was first described by an Indian writer in 1965. It was an ideology that rejected both communism and capitalism, trying to find a market philosophy that would fit Indian society. The writer argued that Western philosophy was not appropriate for India. Accordingly, Indian society is more concerned about the wellbeing of the whole person, and less concerned with materialism and how wealth is distributed. This ideology is deeply rooted in Hinduism. Due to this, the BJP has also been labeled as “right wing” and “Hindu nationalist.” Although the philosophy argues for self-reliance and nationalism, the BJP has generally supported globalization and liberal economic policies, moving away from its original protectionist, industrial policies. The current policies of the BJP support globalization and increasing foreign direct investments into “priority sectors.” Since the party’s inception, its policies have changed to include more open-market support and general economic growth to provide better living standards for everyone, regardless of religious or cultural background.
The BJP, which translates to Indian People’s Party, was formed in 1951 partially as a counter-reaction to the ruling Congress party’s secular politics. The Congress party’s policies were perceived to be too appeasing to the minorities, especially the Muslims and Pakistanis. The BJP wanted to preserve Hindu culture, not necessarily in its religious form but more in its cultural form. The party used its few seats during its first two terms in parliament to focus on the approval of a uniform family code of law and to reverse the special status given to the Muslim regions on the border of India and Pakistan. As an interesting side note, the party was also instrumental in the abolition of the killing of cows. According to the party’s ideology, Hindu culture should be preserved, regardless of religion. A BJP official has contrasted Indian secularism to European secularism. He said that Indian “positive secularism” attempts to treat all religions as equal, while European secularism is independent of religion. It remains to be seen how “equal” will be defined, but we doubt this will be viewed as fair by everybody.
The uniform family code deserves a deeper analysis, as the country still has not implemented a code of family law that applies to all its citizens. Looking at the evolution of Indian law, the country was formed from various tribes with very different religions and customs. Each community was allowed to use its own family laws, which were ultimately based on the scriptures and customs of each of the country’s major religious communities. These laws deal with equal treatment of the sexes, marriage, divorce, inheritance, adoption and alimony. The reason that it has been so hard for India to approve a homogeneous law for all its citizens boils down to the balance between overruling religious minorities’ rights, preserving the national identity and providing fair and unbiased treatment to all. A lack of clear and uniform law has caused several unforeseen problems. Married Hindu men have converted to Islam in order to have more than one wife or proceed with unilateral divorce. Hindu law requires monogamy, while Muslim law allows a man to have up to four wives.
Implementing a uniform civil code is one of the central objectives of the BJP, and has promised to do so if elected. Given the implications surrounding this issue, we do not believe that a solution will be found any time soon. If approached, this could actually bring on more civil unrest as age-old traditions are dismantled.
Ramifications
There are three pivotal points of significance between the political win by the ruling Congress party and the BJP. First, the incumbent Congress party is focused on the redistribution of wealth, while the BJP is emphasizing growth ahead of redistribution. If growth rates pick up, approval ratings will increase as living standards improve for everybody. Second, the Congress party has made an effort to appease both the majority as well as the minorities. However, the BJP seems to run on a platform of uniform treatment for all, which would by default seem to favor the majority, the Hindu population. This could cause broad civil unrest, especially if changes are applied suddenly. Third, the story of a “princeling” from the right background against a humble tea seller resonates with the Indian society. If the self-made tea seller can become the prime minister, this would give hope to India’s millions of poor and untouchables, the lowest in the caste system.
These elections will be historic, no matter the outcome. In the current environment of widespread disillusionment with the existing government and the hopes attached to a Modi victory, even if Modi’s party wins it could still set the stage for disappointment in the incoming government. India’s political process is slow and, even for the most efficient leader, it will take a long time to change policies and even longer for the fruits of the more open policies to be seen. The charisma of the candidate Modi could wear thin fast on the prime minister Modi. Although he has a track record of success in implementing economic reform and the ensuing growth, the hopes attached to him are so great that the chance of disappointment are high.
Kaisa Stucke & Bill O’Grady
May 5, 2014
This report was prepared by Kaisa Stucke and Bill O’Grady of Confluence Investment Management LLC and reflects the current opinion of the author. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
Confluence Investment Management LLC
Confluence Investment Management LLC is an independent, SEC Registered Investment Advisor located in St. Louis, Missouri. The firm provides professional portfolio management and advisory services to institutional and individual clients. Confluence’s investment philosophy is based upon independent, fundamental research that integrates the firm’s evaluation of market cycles, macroeconomics and geopolitical analysis with a value-driven, fundamental company-specific approach. The firm’s portfolio management philosophy begins by assessing risk, and follows through by positioning client portfolios to achieve stated income and growth objectives. The Confluence team is comprised of experienced investment professionals who are dedicated to an exceptional level of client service and communication.
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