India’s stock market has been jittery the last few weeks, on news that the BJP would lead a minority government at the end of the three-month long national elections. Investors have come to associate India’s newfound economic prowess with the BJP and are fearful of a change in government. When the news broke Thursday that the BJP would not only lose its majority but would likely hand over power to the opposition Congress Party, the markets did not meltdown, but in fact rose slightly. But investors remain cautious over the fate of the privatization process and the markets are likely to show volatility in the weeks ahead. Is economic reform in India “locked in”, despite the changing political winds, and can investors count on the new Congress government to continue with the BJP program of trade and investment liberalization?
The victorious Congress party has promised to continue with economic reforms -- with a human face. Indeed, the election manifestos of both the BJP and the Congress were largely indistinguishable in terms of economic policies. There is no question that a Congress-led coalition will have to strike a balance among its partners – including the communists – but most analysts agree that the new government is not about to change course on India’s fundamental move in the direction a more market-oriented economy. Some are in fact predicting that Congress will press for even faster growth than during the BJP years – a double-edged sword -- in order to produce early positive results for the electorate at large.
One reason for this optimism is the appearance of Manmohan Singh as a likely key figure in the new government. Mr. Singh was the Congress Finance Minister widely credited with launching India’s economic liberalization and reform program in 1991. He is being touted now as a potential Prime Minister, should the Italian-born Congress chief Mrs. Sonia Gandhi be deemed as unacceptable to the traditionalists. The BJP government inherited Mr. Singh’s policies and indeed expanded on the reform program, creating the conditions for economic growth that has been second only to that of China. India has in effect had 13 years of progressive, if occasionally fitful, economic reform and has in that period built an ever larger constituency in favor of liberal economic policies. By the end of the 1990s, there was a widespread consensus that Indian economic reform would be “locked in” under the BJP and would remain unaffected by any change in government.
That conventional wisdom has been challenged by the recent election results, but only slightly. On the crucial issue of trade liberalization, Congress is unlikely to raise import barriers or to revert to quantitative restrictions. The internationalist instincts of key Congress advisers may even predispose the new government to a more constructive position in the WTO Doha Round. On privatization (or disinvestment, as it is termed in India), however, the pace in selling off public assets will likely slow. When they were in opposition, both Congress and the Communists opposed the BJP coalition’s policies of selling public sector units. In particular, the former government’s proposal to dilute government holdings in public sector banks to below 50 per cent will likely be shelved under the new administration.
On the whole, the Indian business community is expressing confidence in the desire and ability of a Congress government to continue with economic reform. While the rural
population has sent a very strong signal about the need for more equitable economic growth, it is not clear that the vote was against economic reform as such. According to Rajeev Bhargava, a political scientist at Jawaharlal Nehru University in New Delhi, “this was a vote against economic disparities. . . , not a vote against economic reforms."
Congress itself has gone on record saying economic reforms are imperative but that the benefits need to percolate down to the poor and should not be restricted to the urban upper classes. In the near term, the new government is likely to invest heavily in infrastructure projects such as power plants and highways, in an effort to create jobs and to generate benefits for rural areas.
Foreign investors will be watching closely for any sharp reversal in India’s economic policies. In Canada, the business community has largely ignored India. Bilateral trade is only C$2b, about one-tenth the size of Canada-China trade. Even so, the true extent of Canada-India business is likely understated by a significant margin. A new study by the Asia Pacific Foundation of Canada suggests that Canadian services exports are two and a half times larger than official figures, and that the stock of Canadian investment in India is at least twice as large as shown by Statistics Canada. There is a newfound enthusiasm for India as a business destination, driven in part of the large Indo-Canadian population in Toronto, Vancouver, and Montreal, and by the Federal Government’s new policy on “emerging markets” – which singles out India, China and Brazil as the top priorities. The return to power of the Congress Party in India is no reason to dampen this enthusiasm.
Yuen Pau Woo is Vice-President and Senior Economist and Madhavee Inamdar is a Junior Analysts at the Asia Pacific Foundation of Canada.