After a set of surprise victories in state and local elections last week, India's Congress Party, which governs the country in a coalition, now enters a period of intense campaigning for the national elections scheduled for April 2009. And although its spirits were buoyed by several unexpected victories on Dec. 8, Prime Minister Manmohan Singh's government may find there is not much it can do before Indians go to the polls to improve what voters regularly indicate they care about most—the economy and local development.
Indian business is struggling. Industrial production fell for the first time in 15 years, according to data released on Dec. 12, underscoring how deeply the country's economy has been hit by the global slowdown and paucity of credit for business. The textile industry, the country's largest employer, may have laid off as many as 700,000 workers in the past months, according to some estimates, and even a nearly $8 billion stimulus package released in early December was not enough to pick the once bullish Bombay Stock Exchange off its multiyear lows. "The first priority for the government now is to figure out some way to boost domestic demand," says Mahesh Rangarajan, a professor at Delhi University. "There's no way you are going to see any market-friendly reforms."
Indian law imposes a code of conduct that restricts governments from making major policy changes within about a month of declared elections, reducing Singh's timetable for action. Already the stimulus package, which included $4 billion in new spending, stretches India's fiscal deficit to nearly 10% of its gross domestic product, according to Aninda Mitra, a Singapore-based analyst at Moody's (MCO). That limits how much more money Singh can throw at the problem. With elections looming, Congress may make a few more adjustments to interest rates and perhaps add a few more spending projects, says Rangarajan. "Frankly, I don't think that the government is looking at the fiscal deficit as a primary concern," he says.
Terrorism—An Urban Issue
In New Delhi, for instance, where a popular Congress leader, Sheila Dixit, was returned to power for a record third time, the party campaigned on a platform of development and growth. The capital boasts of the highest per capita expenditure on infrastructure in the country, with new roads, a new metro railway line, brand new government-run buses, and a nearly $11 billion budget for the 2010 Commonwealth Games. The result has been India's highest per capita income and a steady creation of new jobs.
The impact of the Mumbai terror attacks on Indian politics still is unclear. Bharatiya Janata Party (BJP), Congress's biggest opposition, campaigned on an anti-terror campaign (the elections were held on the weekend the Mumbai attacks ended), running front page newspaper advertisements that showed blood running down a wall. But the BJP lost to Congress in three of the five elections. Whether or not that indicates a national trend is unclear, says Biraj Patnaik, a political analyst and expert on malnutrition in India. These elections were decided mostly on local issues, such as the conditions of roads in Delhi and the availability of cheap, subsidized rice in rural Chattisgarh, which is among India's poorest states. "Price rise matters so much more than terrorism," he says, basing his opinion on weeks of travel in the states where the elections were being held. "Terrorism is an urban issue, a middle-class issue."
Without a doubt, India's slew of market-friendly reforms have been effectively stopped since August, when the Congress-led coalition survived a no-confidence vote in Parliament over a nuclear deal that brought India closer to the U.S., but opened its secret nuclear establishments to international scrutiny. Having used up much political capital to survive the no-confidence motion, the coalition hasn't had a lot to spend since. For instance, the government had indicated it might allow foreign companies to hold as much as a 49% equity stake in companies providing military supplies, prompting BAE Systems to seek permission for a 49%-51% partnership with Mumbai-based industrial group Mahindra & Mahindra to make armored and anti-land mine vehicles. The government's Foreign Investment Promotion Board rejected the original application, so BAE came back Dec. 11 with a scaled-down proposal giving it a 26% stake instead, and Mahindra a 74% share, according to the application.
Congress's unexpected victories don't necessarily provide a road map for how India's 695 million voters will move in the April elections. But with 70-year old Congress President Sonia Gandhi's son, Rahul Gandhi, attempting to come into his own as a national politician, this election is also expected to be a referendum on the Gandhi family. For the BJP, which has earned a reputation for strong anti-Muslim views and pro-business policies, the recent results pose a challenge, since it appears that anti-terrorism rhetoric is less convincing to voters than the party had expected.