June 2004

A Change of Guard in India: The 2004 Elections and After

India's recent general elections meant a defeat for the BJP-led coalition government and an unexpected victory for the Congress-led coalition government, which was sworn in on May 22. The result, far from what was anticipated, has left many in Washington wondering what impact this transition will have. Economic growth in India reached 8.2 percent last year--will the new government continue the economic reforms program? Could the new government abandon the peace initiative towards Pakistan launched by the Vajpayee government? Will Congress be committed to improving U.S.-India relations? Walter Andersen, retired chief of the U.S. State Department's South Asia Division in the Office of Analysis for the Near East and South Asia; AEI's Desmond Lachman, AEI; Joydeep Mukherji, director for sovereign ratings at Standard & Poor's in New York; and AEI's Gautam Adhikari, former executive editor of the Times of India,  discussed what the future may hold.

Gautam Adhikari
AEI

In the recent elections, the Congress/UPA coalition replaced the BJP/NDA. Despite being called a dramatic upset, the results of this election are not surprising. Exit polls indicated that the BJP and National Democratic Alliance would actually score well below what they had in 1999, when they won 298 seats. Even though the BJP coalition was expected to score well below this mark this time, it was still expected to surpass the necessary 272 seats. So the question remains, if so much progress was made under the BJP coalition in the last five years, why did they lose the election?

Local politics and economics were the most important factors in this election. Despite having a national coalition government, local politics remain far more important in India, and allies of either coalition can make the difference on the local level. The economy improved dramatically in the past five years, especially during the BJP's last year in power, but not all parts of India were prospering. The services and high-tech sectors have received the most attention, but these sectors only employ about a million people; there are 40 million unemployed people in India. The BJP failed because it was unable to expand its political base beyond North India. Economic reforms are expected to continue under the new government since both Prime Minister Manmohan Singh and Finance Minister P. Chidambaram are reformers. Labor reform and privatization could potentially be problematic; the largest trade unions in India remain affiliated with the Left or Communist Party of India.

But the relationship between India and the United States is likely to continue to develop, and peace talks with Pakistan are likely to move forward. India will continue to develop trade relations with China as well, and the Indian dependence on Russia for military goods will likely expand to oil. The policy of "look East" will continue. Israel will also remain an important partner in intelligence cooperation and defense.

Walter Anderson
Johns Hopkins-SAIS

The Congress party won this election because it put together a better coalition than the BJP. The growing strength of regional parties in India places greater future importance on coalition politics. The BJP and Congress parties received a close number of parliamentary seats (138 and 145 respectively), but the BJP came in second in considerably more constituencies. It is also interesting to note that the BJP-led National Democratic Alliance received more popular votes. A second factor that will influence domestic politics in India is that the new minority government will be dependent on outside support. Power seems to be devolving to the state level in India. It is also devolving within political parties to state units. Indian politics are decentralizing, and this process will continue as state elections hasten this process.

Desmond Lachman
AEI

India has the potential to increase its economic growth, but it could also fall behind. The prime minister, the minister of finance, and other new ministers are reform-minded. However, there are parties within the coalition who are not very enthusiastic about globalization or about economic reform. Economic growth and public finances are crucial to India's economic future.

Since Manmohan Singh instituted reforms after the 1991 crisis, India's growth has picked up 5 to 6 percent. Over the past year, growth has been even more rapid: 8-percent growth that picked up to 10 percent in the first quarter. But this rate is contingent upon beneficial global conditions and cheap energy prices, which are not likely to continue. And compared to China, India looks far weaker. The overall level of investment in India is approximately 23 percent of GDP; this is half of China's level. In foreign direct investment, India has below $10 billion a year, while China attracts about $50 billion.

Reforms must continue in order to close India's economic gaps. High growth and low interest rates are not going to relieve India of fiscal vulnerability. India can either raise taxes or restrain expenditures. Manmohan Singh should remember the crisis of 1991 and convince his cabinet colleagues on the virtues of fiscal prudence.

Joydeep Mukherji
Standard & Poor

Changes in personalities and political parties do not determine India's long-term growth rate. From the 1980s onward, policy has tended toward liberalization. Reformists seemed to have made a comeback in the last six months, promising dramatic liberalization after the election. The political class went into the election promising lower tariffs and looser labor laws. The Congress-led coalition may not last five years. Manmohan Singh knows that he may not have five years to solve the debt and deficit issues. He may have to make compromises to keep the government intact.

The best-case scenario is continued reform. The government can easily attain 5 or 6 percent growth, especially since liberalization reforms have already been implemented. It can also find a temporary solution to India's fiscal and debt side problems. But in the last decade, the gap between the prosperity of the private sector and public sector institutions has grown. The private sector provides poor people with traditional public sector services like basic education and health care. But more privatization is not likely; the government should be believed when it says they are not going to privatize except in exceptional circumstances.

Agricultural liberalization must occur. Signs of interest in agricultural reform are encouraging; some prominent state parties have openly embraced the idea. Because most people live in rural areas, an increase in agricultural growth will probably have a bigger impact on reducing poverty than a similar increase in the industrial sector or services sector.

AEI interns Raakhi Agrawal and Shrayes Ramesh prepared this summary.