India’s national elections in May produced an unprecedented result – an opposition majority government, and a right wing party at that. The right wing Hindu nationalist Bharatiya Janata Party (BJP or India Peoples Party) surprised most observers, and maybe even itself, by winning an outright majority in the lower house of parliament, the Lok Sabha. The economic plank in the party’s and its coalition partners’ platform was “pro-growth” and pro-business. For those hoping to see India continue to move away from its old socialist model, the new government under Prime Minister Narendra Modi has provided very encouraging signs that the BJP means exactly what its campaign rhetoric said.
What happens in India may matter to a lot of Washington residents. The 2010 census reports 50,000 “Asian Indians “living in King and Snohomish counties. Many are involved in IT, e.g., the new Microsoft CEO, or other major employers, e.g., a Starbucks Executive VP. Washington State – India trade last year was only $2.5 billion, but Washington is the second largest exporting state to India (after California). Washington exports to India were six times Washington’s imports. Airplane and paper exports hit new highs, and last year’s agriculture exports were the second best on record. (India’s top exports to Washington were chemicals, apparel and textiles).
India’s parliamentary system had not seen a majority government since 1984, much less one that was not the Congress party’s. Although after 1984 it was forced to rule in coalitions, the generally center-left Congress party still pretty much controlled national power from independence in 1947 until now.
That reign ended dramatically and disastrously for the Congress this year. There have been several opposition governments in the last forty years, but they were coalitions and only one lasted a full five year term.
This time the BJP ran as the lead partner in the National Democratic Alliance coalition. However, since it now has a majority itself, its coalition partners don’t have the time-honored option of playing turncoat if they don’t get what they want, thereby toppling the government. So, barring very unforeseen circumstances, the BJP government is likely to serve its full term (the Congress did so badly this time it did not even qualify to be Leader of the Opposition).
What might this radical, for Indian politics, shift mean for the economy? Even before independence, the Congress party pushed for a socialist economy. Schooled in Fabian socialism, India’s first Prime Minister, Jawaharlal Nehru, determined that government five year plans would shape the economy. Implemented by a new Planning Commission, Government would control the economy’s “commanding heights”, including railways, roads, power, communications, etc. Government corporations would rule heavy industry – steel, coal and heavy engineering, i.e., the “upstream” inputs other industries would require. Imports would be tightly controlled. There would still be a private sector, as there had been even before the British colonialists first arrived in 1615. Now, however, the private sector would do what it was told. Just about any import required a permit. The “License Raj” meant business had to get government authorization to do anything significant. Woe to a shoe company if it had a license to make 40,000 pairs of shoes, and it made 40,001.
Truth be told, this socialist model has been crumbling, more or less slowly, since 1990. That year economic mismanagement had left the then Congress government, as the joke went, down to its last dollar of foreign exchange. The subsequent opening of the economy, e.g., purging most of the License Raj, produced, for a time, GDP growth rates well above the 6% necessary to absorb new entrants to the labor market. India’s spectacular success in cellphones (today close to one per person for 1.2 billion people) happened because of an early 90’s decision leaving cellphones to the private sector (perhaps the government did not expect a large market). When growth slipped again some dozen years ago, new reforms, e.g., lifting most import restrictions and lowering most tariffs, once again produced GDP growth close to 10%. But the last several years have seen only inflation hitting 10% and growth less than 5%. That, no doubt, helped give the BJP a majority this year.
The BJP’s platform called for economic reform and private sector growth. But even in the US political promises don’t always translate into action. What has the BJP actually done so far? Last month the BJP government announced its new budget, a key fiscal policy document in a parliamentary system. There were no big bombshells, not surprising since the government had only been in power a short time, and, again, may not have really expected to be a majority. But there were some smaller explosions. The budget permits private investment, and foreign private investment at that, in the hitherto sacrosanct state railways monopoly – albeit infrastructure and not operations (yet). The percentages of foreign investment allowed in the politically sensitive insurance and defense sectors was raised from 26% to 49%. The budget also called for selling off 49% of the state banks (now 100% owned by the government) to Indians via the stock market (private sector banks were nationalized by a 1970’s Congress government. Despite continuous poor performance and new private banks starting in the 1990’s, they still dominate India’s banking landscape).
Then, in his first Independence Day speech on August 15, the Prime Minister announced the end of the Planning Commission. After 60 plus years of Five Year Plans the Planning Commission still controlled the allocation of much development spending. Now it would soon be gone in favor of a yet to be defined “think tank” that will likely have little if any authority to do anything.
For those hoping to see the BJP accelerating India’s move away from its old socialist path, the new government has made a good start indeed. Still, there is no shortage of obstacles remaining. There is an upper house of parliament, the Rajya Sabha, which could cause temporary trouble and delay. Most importantly, India has a federal structure, with 29 states that have their own powers (e.g., road taxes) and share others with the national government (e.g., electric power). Few of those states have BJP governments. But with a federal majority and a five year term the BJP is already moving forward and away from Indian socialism with all deliberate speed.
Jonathan Bensky is a retired senior US diplomat with 25 years experience supporting U.S. exports and U.S. business in South and Southeast Asia. At times he has spoken several Indian languages.
