Stable government will facilitate India investment

Varad Pande

• Last Updated: April 28. 2009 1:16PM UAE / April 28. 2009 9:16AM GMT

Indians head to the polls. Their country needs a strong government at a time of economic uncertainty. Anupam Nath / AP Photos

India, the world’s largest democracy, is voting to elect a new government in a mammoth electoral exercise carried out over one month. Elections in India are notoriously hard to predict. In this environment of uncertainty, foreign investors are naturally eager to know what India holds in store for them after the elections. Will a new government roll out the red carpet, or will it set up new protectionist walls? One can make at least some educated predictions, drawing upon the track record of the main political groups.

A few things can be said with some certainty. There are three broad possible outcomes in this election. First, the Congress Party-led alliance gets a renewed mandate from the people. Next, an alliance led by the right-wing Bharatiya Janata Party (BJP) comes to power, riding on a wave of anti-incumbency (a BJP-led alliance last ruled India from 1999 to 2004).

The third, less likely but possible, outcome is that the verdict is very fractured and a “Third Front” – a motley crew of small regional and communist parties – forms the government, possibly with the outside support of the Congress Party or BJP.

In case the Congress Party-led alliance comes back to power, one should expect continuity in the broad policy environment towards foreign investment. The Congress Party is credited with opening the doors to India’s economy back in 1991.

Key members of the party’s leadership team remain in senior positions. The then finance minister, Manmohan Singh, is the current prime minister and will continue in that position if the party prevails. Other members of the Congress Party “economic dream team” will be in ministerial positions if the party forms the government. They share a fundamental belief in the role of foreign capital in India’s economic development, though one has seen the party use some cautious rhetoric on foreign investment during the election campaign: their manifesto, for example, says that the “emphasis in all foreign investment policies will be maximisation of local value-addition and export potential”.

In its present term, the Congress Party-led coalition has concentrated a great deal on social issues and rural India, providing rural employment guarantees and increasing the purchasing power of the vast rural population.

At the end of the day, the extent to which a Congress Party-led government will further ease the environment for foreign investment will depend on whether, and to what extent, it will need to rely on the support of leftist parties, which are largely opposed to foreign investment.

The BJP-led NDA government in the 2004 elections was credited with the “India Shining” slogan. It undertook a disinvestment drive and spearheaded big infrastructure projects such as national roadways and highways. Its deputy prime minister and home minister, LKAdvani, will be prime minister if the BJP wins, and the finance minister is likely to be reformist and supportive of foreign investment.

The BJP manifesto this year focuses on massive infrastructure projects – it has also issued a separate “Infrastructure Vision” document – and aims to unearth black money to channel into productive use.

The party also promises to fight against protectionism by other countries before promising more on the Doha round of trade liberalisation.

The BJP’s weakness in the past has been unstable coalition partners, one of which withdrew support in the late 1990s and toppled the government.

It is likely that at a broad level, there may not be major differences between the policy directions taken by a Congress Party-led or a BJP-led alliance. Some subtle differences may exist that will have implications for investors – such as the Congress Party focusing more on rural and social issues, giving a fillip to the agricultural and consumer goods sectors, while the BJP would have a bigger urban agenda, impacting infrastructure, logistics and capital goods sectors. Neither may focus strongly on capital inflows in financial services nor embark on a disinvestment drive just yet, however, given the weak global economic environment and the lack of political consensus on these issues.

The third outcome – a Third Front government – provides very little clarity on policy outcomes, as many of the parties in this coalition have, at best, provincial-level agendas, which cannot be mapped onto a national one. The Left is likely to be an important member of the ruling coalition, and it may yet get a chance to roll back some investor-friendly policies that India has implemented in the past decade, such as reducing the participation of foreign investors in sectors like financial services, power and infrastructure. It is also important to note that while rhetoric is one thing, the last time there was a Third Front-led government – June 1996 to Dec 1997 – the reforms agenda was taken forward quite substantially. In any case, based on their experience in the provinces, regional parties are more reform-friendly than the Left.

If the Left supports a Congress Party-led alliance, it may not be able to roll back market-friendly policies but could slow down the implementation of new ones.

What does all this mean for foreign investors looking at India? First, with relatively high growth prospects and yields, India will remain an attractive investment destination for foreign capital in the medium term. Its strong domestic demand has somewhat distinguished it from other emerging markets as global investors once again start looking for investment destinations.

Second, as economists at Goldman Sachs have recently noted, elections in the past have not interfered with the business cycle whenever a stable government has been formed in India.

The key risk to India today is an unstable government, which could come in the form of a coalition of regional parties and the Left.

Last, while we are likely not to see further easing of the investor-friendly environment in the early years of a new government, a slew of other reforms that both the Congress Party and BJP have committed to – such as simplifying the tax regime, improving corporate governance norms and reducing bureaucracy – will only serve to improve the environment for foreign investors if implemented.

Varad Pande is a senior consultant in the UAE office of Monitor Group, a global strategy consulting firm.