The large voter turnout and enthusiasm that has marked India’s elections underlines the country’s yearning for change. After enduring an unrelenting four-year stream of sleaze and lacklustre economic performance, voters are hungry for a clean and effective government that can reignite the country’s growth engine. Whoever emerges to lead the new administration will, however, face a short honeymoon. The formation of a new government may well alleviate some investor uncertainty and spur a fleeting bull run on the stock market, but policies to create jobs for impatient youth will require long-term structural reforms. In other words, the new prime minister can look forward to a prolonged spell of legislative haggling and knocking of heads among his squabbling coalition partners.
An important factor in this election has been the high participation of young voters, disgusted by corruption and frustrated by a lack of jobs. Regardless of the ebbs and flows of the global economic environment, better macro-economic policies and governance will be needed to meet the electorate’s expectations. When the UPA took office in 2009, the world was still processing the shock of a global financial crisis. Doubtful of the prospects for export-led growth, and buoyed by the support of rural voters whose ballots underpinned its victory, the UPA II adopted anti-poverty policies and boosted agriculture with farm subsidies. In hindsight, this might have been a miscalculation. The government’s misplaced policies led to grain rotting in warehouses, yawning budget deficits and double-digit inflation.
Most alarmingly, private investments took a nose dive. An International Monetary Fund study titled “Disentangling India’s Investment Slowdown” noted the falling rate of fixed capital formation — from 15 per cent annually before 2008 to just 1.75 per cent last year. Average GDP growth also fell, from 9.5 in 2009 to just 4.7 per cent last year.
Some of India’s corporate leaders have argued that high interest rates over the past several years have been the main cause of the investment slowdown. But the IMF study concludes that ‘heightened policy uncertainty’ rather than high financing costs was the critical factor. The study specifically points to high-profile tax policy decisions announced in the 2012-13 Budget as having diminished foreign investors’ interest in India. Other negative factors were the increasing difficulty in obtaining permits for land use, and delays in environmental clearances. Delays in the implementation of projects and regulatory hurdles were linked to the charged atmosphere created by corruption scandals in which bureaucrats played it safe by delaying decision-making.
A new government elected on a mandate to spur growth will probably not suffer the policy uncertainty of its beleaguered predecessor. It may also possibly amend tax policy. But any changes in environmental legislation and land policies for facilitating investments will require parliamentary cooperation — and, most importantly, the acquiescence of state governments which, in many cases, will be ruled by opposition parties. Moreover, ministry bureaucrats accustomed to adhering to long-established procedures will be less amenable to diktats than their counterparts in the state civil services. The speed and efficiency with which private investors were accommodated in Gujarat is unlikely to be replicated in Delhi. Whether or not Jan Lokpal remains a toothless tiger, public awareness about corruption involving government contracts and cozy deals between politicians and business is likely to impose caution. Irrespective of the electoral success of the Aam Admi Party, the anti-corruption zeal that propelled it to power in Delhi’s state election is unlikely to dissipate.
While making efforts to deliver growth and jobs to an impatient electorate, the new government will have to hasten slowly within the existing framework of the law.
Nayan Chanda is editor in chief of YaleGlobal Online, based at the MacMillan Center of Yale University.