Congress Party Rout in India Risks Economy-Overhaul Agenda as Gandhi Flops

India’s ruling Congress party was routed in regional elections, a defeat that shattered claims by its chief campaigner Rahul Gandhi to have rebuilt support and endangers the government’s agenda to boost a flagging economy.

Gandhi, 41, touted to replace his mother as Congress chief this year, took responsibility for the party’s performance in India’s most populous state of Uttar Pradesh where it was set to win 7 percent of seats. An unexpected loss in Punjab underscored how Congress is struggling to escape blame for rising prices and alleged corruption two years before a national ballot.

“I have campaigned for the party, I was standing at the front, so I accept responsibility,” Gandhi, the scion of a dynasty that has dominated Indian politics since independence, said outside his family home in New Delhi yesterday as he vowed to continue working to build Congress. “I expect to have victories along the way and I expect to have defeats. This is one of the defeats, so I take it in my stride.”

The poll verdict reduces the chances of the Congress-led government attempting to push through controversial policy changes, including allowing foreign companies to set up supermarkets, according to analysts at Goldman Sachs Group Inc. (GS) An anti-corruption bill first proposed in parliament in 1967 and opposed by many politicians may be another victim.

“The results will not provide the political space for the government or give it the confidence to carry through unpopular reforms,” Goldman analysts led by Tushar Poddar in Mumbai said in a note to investors yesterday. “The best that can be hoped for is muddle-through policies by the government.”

Retail Plans

Prime Minister Manmohan Singh’s Congress endured one of the most challenging periods of his eight-year premiership last year as graft scandals and clashes with parliamentary partners stalled legislation. Plans to allow foreign companies such as Wal-Mart Stores Inc. (WMT) to open supermarkets were among those shelved.

In an interview in December, Singh said he would bid to revive the retail proposals after the state elections. Small shop owners and some political parties say the plan will lead to the loss of millions of jobs.

Business leaders have called on Singh to accelerate policy changes as growth moderates. India’s economy grew 6.1 percent in the last quarter, the slowest pace in more than two years, as domestic demand weakened and the global recovery faltered. Finance Minister Pranab Mukherjee will announce the federal budget March 16.

‘Terrible Result’

After more than three months of intensive campaigning in Uttar Pradesh, Gandhi was looking to revive the Congress vote to rebuild morale in the party. Instead the losses in Uttar Pradesh and Punjab show Congress is struggling to counter the rise of regional parties ahead of the 2014 poll.

“This is a terrible result for Congress,” said Surjit Singh Bhalla, chairman of New Delhi-based Oxus Fund Management. “This is clear punishment for its failure to govern.”

Elections in 2010 in Bihar, India’s third populous state, also exposed the limits of Gandhi’s ability to draw votes. The party only managed to secure four seats in the local assembly.

In the elections in Uttar Pradesh, home to 200 million people, the regional Samajwadi Party won an outright majority in the 403-member assembly, according to data from the Election Commission. Congress won 28 seats, just six more than it secured in 2007, and won’t play any role in forming the next administration.

Free Laptops

The Samajwadi Party led by former wrestler, Mulayam Singh Yadav, 72, has traditionally been supported by those at the lower end of the country’s traditional Hindu caste hierarchy and Muslims. He has been elected chief minister of Uttar Pradesh three times and is a former federal defense minister.

The Samajwadi Party, which before a general election in 2009 vowed to reduce the use of English in education and protect jobs threatened by computers, promised free laptops for students and loans to farmers in its manifesto. The party is opposed to overseas investment in the retail sector.

In other elections, Congress narrowly beat its main nationwide rival, the Bharatiya Janata Party, in the northern state of Uttarakhand. While it retained power in tiny Manipur, the BJP ousted Congress in the tourist state of Goa.

In what is the most important ballot since the general election nearly three years ago, the result in Uttar Pradesh is a significant setback for Congress.

It was also a personal defeat for Gandhi, who had been supported by his mother, Congress President Sonia Gandhi, and sister Priyanka during an intense three-month campaign.

New York-based Eurasia Group said last year that it expects Gandhi to become the party’s next leader in 2012.

Yesterday’s results leave “Rahul Gandhi very precariously placed,” said Bhalla. “He has been completely ineffective, he just has not been able to carry the voters.”

To contact the reporters on this story: Bibhudatta Pradhan in New Delhi at bpradhan@bloomberg.net; Andrew Macaskill in New Delhi at amacaskill@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

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