India in 2013 will be one of the prime examples of the intrusion of political factors into what had been until recently seen as a long-term economic success story. We have all read articles about how, with the looming long-term structural slowing of China’s economy, India was poised to become the world’s next “growth uber alles” country. Not so fast.
A landslide re-election in 2009 enabled the Congress Party coalition to rule without the encumbrance of the communist party, which congress often blamed for holding back reform. Markets surged, and expectations rose for a new round of fundamental reforms. After all, the architect of Indian reform, Manmohan Singh, was now in full control, and could claim both the confidence of party leader Sonia Gandhi and the commitment of a large group of savvy technocrats ready and willing to push the reformist boundaries. Large-scale reforms – to mining, energy, land acquisition, tax regimes, financing instruments and more–were to boost economic growth toward a 10% trajectory.
But while India sustained generally substantial growth rates, the tough political choices on reform were continually left for the next parliamentary session, and the breakthrough to higher growth was not achieved. Instead, corruption issues tainted the government, coalition partners proved to be less compliant than expected and, most importantly, the anti-reform elements within congress showed that they still had considerable political clout and influence with the “ruling family.”
In 2013, the ability of the government to implement robust economic policies will decline even further, perpetuating India’s “stalling or falling” outlook. As general elections draw closer, political opportunism and obstructionism will increase. Any support for reform from the fickle regional parties that hold the balance of power in parliament will likely wane. These parties will distance themselves from the unpopular, corruption-tainted congress, increase the powers of the state governments they control vis-à-vis New Delhi and position themselves as kingmakers in the post-election landscape.
Congress’s appetite to push for any reforms will diminish as it goes into full-blown campaigning mode. For its part, the opposition BJP will remain obstructionist, especially given that it will be politically consumed by figuring out who should lead the party in the upcoming election battle. These trends will be exacerbated if the election is held early, before the end of 2013. Poor policymaking will extend to fiscal policy, where any meaningful fiscal consolidation in 2013 is unlikely.
The government could seek to boost its support in the rural areas through an agricultural loan waiver program -- a traditional Indian election-year gimmick. Even more problematic for long-term fiscal balance would be a national food security bill that Sonia Gandhi sees as a key vote-winning plank for congress. This could increase India’s food subsidy spending by the equivalent of 2% of GDP. Populist pressures and India’s fractious political environment virtually guarantee that the government will not deliver on its 2012 budget promise to reduce total subsidy spending to 2% of GDP.
Continued profligacy heightens the looming risk of a sovereign ratings downgrade to “junk” status, though the government will seek to accomplish just enough on the reform and fiscal fronts to forestall a downgrade, which heightens India’s fiscal troubles by raising the government’s borrowing costs. It would also precipitate a fall-off in FDI inflows and a likely outflow of foreign portfolio inflows, which in turn would put downward pressure on the rupee.
In the best of circumstances, the political context for economic reform might improve following the elections. But, at this point, the more likely outcome is that India’s policymaking environment becomes even more difficult as the poll is expected to return a more fractious and divided parliament, generating a weak ruling coalition without the political support for a strong reformist push.
