20 February 2019
Supporters gather at  a Bharatiya Janata Party rally. Photo: Bloomberg
Supporters gather at a Bharatiya Janata Party rally. Photo: Bloomberg

Too early to celebrate India’s economic revival

There was a dramatic end to India’s general elections last week, with the country’s electorate delivering a clear verdict.

The Bharatiya Janata Party (BJP) won 282 seats of 543 in the lower house of parliament (Lok Sabha), comfortably above the 272 seats required for a simple majority.

With an embarrassingly low 44 seats, the Congress party, which led the coalition government for the past 10 years, did not even reach the 10 percent threshold for forming the opposition.

The clear mandate provides a better, more stable platform for governance. In the absence of stubborn regional parties determined to protect their states’ electorate and stand in the way of pro-growth reforms, it will facilitate quicker decision-making at the centre.

It will also help to reduce uncertainty and political risk, potentially leading to higher business and consumer confidence. For this reason, Moody’s credit rating agency deemed the election outcome “credit positive”.

Financial markets welcomed the BJP win not just because of the clear majority but also because the BJP has earned a reputation for being pro-business. Many believe it will help to lift India out of its current economic mire. Share prices scaled record highs and the rupee strengthened to its highest level since last June.

We take a more cautiously optimistic stance on the election results, however. India is still suffering from a number of fundamental problems that will take time to eradicate.

The fiscal position remains precarious and anecdotal evidence suggests that the public finances are in a much worse state than has been officially reported.

Therefore, the new government will have little wiggle room to increase capital expenditure to boost infrastructure and raise potential growth.

Corporate debt, as well as bad loans in the financial sector, have risen substantially, holding back the much-needed kick-start to investment. So regardless of the party in power, businesses will still struggle to invest and banks to lend.

In the longer term, to be able to achieve the government’s target growth rate of about 8 percent, India needs an institutional overhaul aimed at reducing crony capitalism and improving the business environment. There is scant evidence the BJP is much better than the Congress in this regard.

Indeed, prime minister-designate, Narendra Modi, has close ties with big businesses like the Tata, Reliance, Ambani and Adani groups. It would be surprising if he were not to show favoritism toward these giant corporate entities.

While having a good relationship with them should help to develop the country’s infrastructure, it will also promote the culture of crony capitalism and prevent smaller businesses from flourishing. Not only will this have a net negative impact on the economy, it is also likely to extend the acute inequality that currently prevails in India.

The BJP has mentioned reform and development as primary objectives in its election manifesto, but it remains to be seen whether the party will deliver on these promises.

Links to an extremist right-wing group (Rashtriya Swayamsevak Sangh) characterised by Hindu nationalism, together with Modi’s track record of inaction when thousands of Muslims were killed in 2002 during riots in Gujarat, raise questions in some quarters about the priorities and integrity of the BJP.

So while we believe there is reason to be optimistic, it is too early to celebrate an economic revival in India.

The writer is a member of Oxford Economics’ international macroeconomic forecasting team.

– Contact us at [email protected]


Financial markets have welcomed the BJP win, with share prices scaling record highs.

A member of Oxford Economics’ international macroeconomic forecasting team.

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