India's competitive politics and outcomes

Fund managers and market analysts must stop fretting about 'big bang' reforms

It wasn’t just the exit polls and self-styled poll experts who got their forecasts for the 2024 general elections horribly wrong. Market analysts and fund managers didn’t fare much better either.

The investment bank Nomura, for instance, reported the results of a survey of around 150 investors carried out from May 21 to May 27. Eighty-three per cent of those polled expected the Bharatiya Janata Party (BJP) to get a simple majority on its own, with 36 per cent expecting the BJP to fare better than in 2019. On average, respondents expected the National Democratic Alliance (NDA) to win 344 seats, not very different from the forecasts of exit polls.

Fund managers and market analysts claim that they now reach out into the Indian hinterland and talk to manufacturers, vendors, consumers and others in arriving at a view on the economy, sectors and companies. If they could go so wrong with their poll forecasts, one can only hope that their judgement of individual companies and sectors is a little better.

Investors’ views on election outcomes seem terribly superficial. In the Nomura survey, investors expected the Indian economy to grow at 7-8 per cent if the NDA government returned to power; if the INDI (Indian National Developmental Inclusive) alliance won, growth would dip below 6.5 per cent. Why? Because, as  Nomura said in a note that followed the exit polls, “If the BJP returns with renewed majority, it should have the political capital to push through meaningful reform”. In contrast, an INDI government would mean a continuation of the status quo.

How naïve! Investors seem to be blind to the economic record of the past three decades and to the NDA/BJP’s own record. They must know by now  that a majority government is not necessarily better placed than a coalition to push through the “big bang” reforms — such as hire and fire in the labour market, aggressive privatisation, easier land acquisition, among others — that are supposed to deliver growth of over 7 per cent. The BJP enjoyed a majority on its own following the 2014 and 2019 elections. Yet, many of the “big bang” reforms that market analysts have been clamouring for over nearly two decades now did not happen.

The record of the NDA government on one item, privatisation, is revealing. In February 2021, the government unveiled a policy of selling off all public sector units (PSUs) except for a few companies in four strategic sectors. Nothing of the sort has happened.

Privatisation targets have been scaled down significantly. In the Budget for 2020-21, the government had targeted a figure of Rs 2.1 trillion; it realised a mere Rs 33,000 crore. Thereafter, the targets have been modest and even these were not achieved. One issue that worries a large segment of the electorate is that with privatisation, job quotas in PSUs are lost. No government can afford to ignore this concern post the 2024 poll results.

The same can be said of other “big bang” reforms. There has been some moderation of the labour law codes that related to hire and fire but nothing on the scale that would-be reformers have asked for. The one “big bang” reform that the NDA government attempted, namely, farm laws, had to be rolled back. Fiscal consolidation has happened in recent budgets but we are still considerably away from the Fiscal Responsibility and Budget Management target of 3 per cent.

The 180-degree turn in economic policies, as everybody knows, commenced with the Narasimha Rao-led coalition government in 1991. Thereafter, successive governments have opted for incremental economic reforms rather than big leaps because that is what the democratic system will permit. The newly formed NDA government may be expected to follow the same path.

India has a highly competitive political system and an electorate that understands the power of the ballot. To fare well at the hustings, political parties have to address the expectations of various constituents of the electorate. Farmers have to be given subsidies. The poor have to be given subsidies. Public sector employees cannot be alienated. The middle class, too, has to be catered to.

Economic policy cannot be framed simply from the standpoint of boosting corporate profits and the Sensex. It has to factor in the requirements of equity, financial stability, and the need for strategic autonomy. The growth rate that we have now settled at —of 6.5 to 7 per cent— represents the optimal outcome after all these considerations are factored in. No political grouping is exempt from these compulsions. India’s long-term economic growth is thus less contingent on the complexion of any particular government at the centre than market analysts are apt to suppose.

Market analysts may chafe at the limitations that democracy imposes on India’s economic growth. They need to wake up to its strengths as well. Many commentators have noted how Indian democracy has humbled complacent governments time and again.

There is another strength that is not adequately appreciated. Precisely because the electoral process is so competitive, the system throws up leaders of considerable ability. India’s Prime Minister emerges from a pool of 1.4 billion people. Chief ministers emerge from pools of several hundred million in states that are bigger than many leading nations in Europe.

In his book, The Great Escape, economist Angus Deaton notes that the two largest countries in the world (China and India) have been amongst the most successful over the past quarter of a century. He attempts a conjecture. “A diplomatic corps, a competent bureaucracy, a few well-trained leaders, and the faculty of a world-class university cannot all be filled with only a handful of people, and larger countries have larger pools to choose from.” Thus, large size translates into high quality in different fields.

In the political realm, we have the equivalent of the IIT/IIM/IAS entrance examinations or the selection of the Indian cricket team. Whoever makes it to the top in India’s highly competitive political system can be expected to have what it takes to administer and deliver performance. “After Nehru, Who?” was a refrain heard through Pandit Nehru’s long years as Prime Minister. The implied suggestion was that with Nehru’s passing, India would face a leadership crisis. The years that followed have seen India march ahead under a succession of Prime Ministers. 

So, fund managers and market analysts may stop fretting about political stability, the supposed lack of major reforms, and the prospects for the Indian economy. They might cultivate a little more respect for India’s democratic processes.

ttrammohan28@gmail.com