Narendra Modi will become prime minister on the back of a pro-business and pro-FDI election campaign.
IHS perspective | |
Significance | India's parliamentary election resulted in the Bharatiya Janata Party (BJP) and its allies securing enough seats to form a government without the need for further coalition-building. |
Implications | The BJP alone attained a parliamentary majority, meaning that the new government will be the strongest in India since 1984 and will bode well for political stability. |
Outlook | The BJP is likely to attempt to clarify corporate taxation, encourage FDI in all sectors except retail, and promote private sector participation in energy and infrastructure. However, the underlying risks of corruption and state-central government politics will remain and much will depend on Modi's transition from being Gujarat's chief minster to India's prime minister. |
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Narendra Modi flashes a victory sign on 13 May. |
The Election Commission of India today (16 May) revealed the results of the parliamentary election, showing the opposition Bharatiya Janata Party (BJP)-led opposition coalition sweeping to power. The BJP-led National Democratic Alliance (NDA) won 337 of 543 seats in the Lok Sabha (parliament's lower house), while the BJP itself secured 283 seats, underlining the wide appeal of its prime ministerial candidate Narendra Modi who spearheaded the party's election campaign. This marks the first time since 1984 that one party has been able to secure a majority in the Lok Sahba. In contrast, the Indian National Congress, which has led the central government for the past 10 years, has suffered its worst election result ever. The party individually won 43 seats, with its United Progressive Alliance (UPA) coalition managing to secure only 58. Congress spokesman Shakil Ahmed has already conceded defeat, saying that the voters had rejected the country's oldest party. National turnout reached a record 66% and included a large proportion of first-time voters, many of whom voted for the BJP according to exit polls. The two main national stock exchanges have repeatedly reached record highs in the past week in anticipation of a strong pro-business mandate.
End of policy paralysis
The last two years of the Congress-led government has been plagued by the weakness of the ruling coalition and politically destabilising corruption scandals. Since last year, the UPA government has relied on the support of loosely allied coalition partners and has been unable to push through laws opposed by smaller regional parties. The last Lok Sabha passed the least legislation in modern India's history. In this context, the strong government that the BJP will now lead will be a significant risk-positive indicator. The overwhelming mandate that the BJP has secured will also mean that the party will have little incentive to form alliances with regional parties outside its alliance. Nevertheless, former BJP president Nitin Gadkari has said today that the party would be willing to invite others into the ruling coalition despite the BJP's majority. However, the BJP's strong position means that any new partners are unlikely to have significant influence.
Approach to FDI
The BJP campaigned on a pro-business platform, but this was broadly centered on Modi's track record in Gujarat state, where he has been chief minister since 2001. The party revealed little in its manifesto (released a day before voting began) about specific policies. However, it did say that a BJP government would welcome foreign direct investment (FDI) in all sectors, except for retail. This reflects a key constituency for the party: lower-middle class traders and small business owners, who continue to oppose FDI in retail vehemently.
Taxation
A major factor in the decline of FDI has been the numerous tax disputes involving the Indian government and foreign companies, including Nokia, Royal Dutch Shell, and Vodafone. The BJP has voiced plans for a simpler tax structure with several of their party analysts looking at radical measures, including abolishing income tax (for which collection is very poor in India) and introducing an easier to administer expenditure tax. Although the BJP manifesto does not delve deep into these proposals, a simpler tax structure that would look at unifying the service tax, luxury tax, and VAT would benefit the small- and medium-sized enterprises that form a significant portion of the party's vote bank. Benefits for the middle class with higher income tax exemption limits and saving options are also likely. A simpler central tax structure reducing service tax and VAT would be widely welcome both among traders and corporate India at large.
Opportunities in energy and infrastructure
A BJP-led government is almost certain to undertake energy reform. The party believes that the Congress-led government's energy policy over the last couple of years has been plagued by the same policy paralysis as most other policy sectors, and has led to confusion and unwanted disputes with the energy sector. In particular, it has had problems fixing gas prices to contain its massive energy subsidy bill, and a long running dispute with Reliance Industries (RIL) over the development of oil and gas blocks has contributed to a lack of interest from oil majors in bidding for new concessions. The BJP government is likely to be more sympathetic to concerns raised by the private sector about issues pertaining to the oil and gas sector. Fresh auctions that are scheduled to be held before the end of 2014 will probably be delayed until 2015, as the new government tries to make the auction of these blocks more attractive for international majors.
The BJP will also probably expand private investment opportunities in infrastructure, which the opposition party is keen to develop, especially in road connectivity and energy. Some firms have already announced their intention to invest heavily in Indian infrastructure: Bloomberg reported in March that the India-based TATA Group plans to invest more than USD8 billion in roads, airports, and housing after the election.
Outlook and implications
Modi is due to take his oath on 21 May, but a key indicator will be how he manages his transition from Gujarat's chief minister to India's prime minister. His Gujarat model was seen to be one of bureaucratic efficiency and clean governance mainly due to Modi's willingness to cut red tape and devolve decision-making. IHS expects a similar situation in the centre with the widely respected Indian Administrative Service being given more freedom. However, Modi's track record in Gujarat shows that he is generally intolerable to criticism and rivals. This election has also been more focused on his personal appeal than on policy or party loyalty. As such, he is likely to consolidate the BJP's leadership, potentially sidelining senior party figures, such as LK Advani, Yaswanth Sinha, and Sushma Swaraj for major ministerial berths in favour of a new guard featuring Arun Jaitley, Amit Shah, and Rajnath Singh.
Although Modi as prime minister will be overall risk-positive for doing business in India, the underlying risks are likely to remain. Neither the BJP nor Modi are likely to be able to overcome corruption quickly and the problems in dealing with state governments. For instance, as prime minister, Modi would very probably attempt to expedite stalled foreign investment projects, which are delayed by state government bureaucracies. While this will be relatively easy in states where the governments are led by the BJP (of which there are only five), other states will be unwilling to accept the BJP dominance.