Promising the good times: An overwhelming election victory promises to reshape Indian politics

Promising the good times: An overwhelming election victory promises to reshape Indian politics

May 24th 2014 | DELHI | From the print edition

INDIA brims with colourful politicians, but none has quite the sense of political theatre of Narendra Modi of the Bharatiya Janata Party (BJP). He swept into Varanasi, India’s most ancient city, on May 17th pledging to clean the Ganges, its holiest and filthiest river. Three days later, in Delhi, BJP parliamentarians chanted and roared unanimous support for him, and he broke down in tears in mid-speech. After that he called on India’s president, Pranab Mukherjee, who agreed to swear him in as India’s 14th prime minister on May 26th.

Mr Modi won the election by a margin almost nobody imagined possible. Last year he spoke of an aandhi, a “storm blowing in our favour”. The storm broke, marking a national political shift as big as any since independence in 1947. Mr Modi smashed the long domination of Congress. In no previous national election had any single party got more votes than Congress; this time the BJP stunned its rival, winning 31% of the votes to Congress’s 19%. No single party other than Congress had ever before won an outright parliamentary majority; this time the BJP alone took 282 of 543 seats (see map). Add its closest allies in the National Democratic Alliance and the tally is a handsome 336. Congress got just 44.


Mr Modi’s victory has disproved an article of political faith from the past three decades: that India’s messy democracy, cursed by strong regional and caste-based parties, could produce only fragmented outcomes and weak coalition governments. This, the clearest result since 1984, should mean stable, decisive and predictable rule. Mr Modi, not one to hold back, hints at being in office for a decade or more.

The scale of Congress’s defeat means that is no idle ambition. In Amethi, the Uttar Pradesh (UP) constituency of Rahul Gandhi, Congress’s young leader, voters sharply cut their MP’s once-huge margin of victory. Villagers there said they wanted economic development, not feudal charity. Everyone had expected Congress to slump to a historic low, but its collapse is so complete that some doubt it can even act as an opposition. Mr Gandhi and his mother, Sonia, gracelessly failed to congratulate Mr Modi. Their perfunctory offers to quit party posts on May 19th were refused by Congress sycophants. None of that suggests a party ready to learn from failure.

But in this election Mr Modi has accomplished much more than just the defeat of Congress. In Varanasi, where he was elected as MP, he flattened the anti-corruption campaigner, Arvind Kejriwal. Mr Kejriwal’s Aam Aadmi Party got only four seats nationally, all in Punjab. That suggests it was a blunder to seek a David-versus-Goliath clash with Mr Modi: sometimes Goliath wins.

Mr Modi was also in Varanasi to relish his success throughout UP, a backward state of 207m, where the BJP swept 71 of 80 seats. Along with 22 out of 40 seats from neighbouring Bihar, this was the core of the BJP’s national victory. Triumph gave the lie to the idea that the party won only because of voters’ grumpiness at the national misrule of Congress: in these states it had to wallop regional parties, as Congress has long been sidelined there.

The fate of those regional parties was instructive. BJP strategists outplayed them. UP’s biggest loser was Mayawati of the Bahujan Samaj Party dominated by dalits, previously “untouchables”. She got a fifth of votes cast in the state, and the third-biggest share nationally, but the first-past-the-post electoral system ensured that her party won no seats. The BJP translated popularity into power with historic efficiency, needing an average of only 600,000 votes for every seat won. Hapless Congress averaged 2.4m votes per seat, the Aam Aadmi Party needed 2.8m.

In Bihar the battered regional leader, Nitish Kumar, quit as chief minister on May 17th. Once lauded as a potential national leader and a responsive figure who brought big development gains, his fall since breaking an alliance with the BJP in 2013 has been precipitous.

Yet regional parties were not uniformly in retreat. Collectively they still got about half of all votes, as they have since the 1990s. Some fared spectacularly. The party of the chief minister of Odisha (formerly Orissa), Naveen Patnaik, took 20 of 21 seats and a fourth successive victory in concurrent state elections. In southern Tamil Nadu the party of Jayaram Jayalalitha, its chief minister, quadrupled its tally to 37 of 39 seats. Mamata Banerjee, who rules in West Bengal, got 34 of 42 seats. In the newly split states of Andhra Pradesh and Telangana local parties now hold sway.

Modi’s operandi

What explains the BJP’s sweeping success? The answer matters: misreading previous election results led Congress to make poor policy choices. It mistakenly thought voters in 2004 had not cared about economic growth (in fact they had, but Congress won thanks to quirks in alliance politics). After winning in 2009 Congress deluded itself that promises of rural welfare had brought victory, when in fact it was job-hungry urban voters who put their faith in Manmohan Singh, the outgoing prime minister. Neglect since of young, aspiring town-dwelling voters cost Congress most.

There are many reasons why Mr Modi won so convincingly. His slick, expensive campaign shaped local media coverage: the BJP will not say, but it probably spent $1 billion. He is a gifted public speaker, vocal and strong. An outsider, he brings an enthralling story of rising from being a mere tea-seller’s son. His lowish caste, as an “Other Backward Class”, played well, especially in caste-obsessed UP.

Hindutva, a doctrine of Hindu supremacy, also counted, appealing to voters proud of their heritage and often antagonistic to Muslims. Mr Modi mostly eschewed anti-Muslim language, aside from barbs at Bangladeshi “infiltrators”. But his credibility among the Hindu right was long ago established, so he needed do little more than devote attention to Varanasi and “maa Ganga” (mother Ganges), or pose with a big portrait of Lord Ram near the controversial site of a ruined mosque.

Hindu nationalist volunteers from the Rashtriya Swayamsevak Sangh (RSS), to which Mr Modi has belonged since childhood, also helped, lifting overall turnout to a record 554m, or 66%. Meanwhile Mr Modi made no special effort for religious minorities. Just seven of 482 BJP candidates were Muslim, and none won. The new Parliament has fewer Muslim MPs than any since 1952.

For all that, it was Mr Modi’s talk of vikas (development), that guided the campaign. That chimed with a widespread yearning for prosperity. In every speech Mr Modi listed practical gains that flowed from his rule in Gujarat: reliable power and water, decent roads, flourishing industry, less of the most corrosive forms of graft. Voters who chanted “Modi, Modi, Modi” often said that one word, “Gujarat”, signified their hopes for similar material gains.

The BJP’s cheery slogan, “Good times ahead” captured such hope. Mr Modi has used it since the election, too. Addressing Parliament on May 20th, he spoke of being judged on his record at the next election in 2019, especially on helping the poor, saying: “I want to tell India we must be optimistic.” Mr Modi knows that electoral fortunes can swing fast, but voters reward governments that get results. He was elected three times in Gujarat. The first time, in 2002, he won on the back of Hindu nationalism after communal riots that killed over 1,000. The next two successes came mostly by bringing about development.

What’s good for Gujarat…

His challenge as prime minister is to prove that he can get decisive and efficient government out of a political system long unable to get things done. Perhaps that is why he has offered “absolute co-operation” to sympathetic parties, seeking a broad coalition, for example to get legislation through Parliament’s upper house, where the BJP has only 48 of 243 seats.

Those inclusive intentions may clash with his leadership style—“authoritarian”, says a sympathetic journalist in Gujarat. By instinct Mr Modi centralises power, so his prime minister’s office will be mightier than its recent predecessors. He may install a slim cabinet packed with technocrats. Those close to him say he behaves as a chief executive, setting ministers and senior bureaucrats tasks with deadlines and expecting them to report back on time. Speaking in Parliament on May 20th, he advised his colleagues—furiously lobbying for cabinet jobs—that what counts more are the tasks they complete, not the positions they hold. Corporate India likes the sound of that; some are comparing him to Singapore’s Lee Kuan Yew.


An autocratic style could also clash with a second ambition, to let states’ chief ministers have a greater say in policymaking and implementation. Mr Modi needs co-operation from pro-business and reformist chief ministers—for example Chandrababu Naidu, back in Andhra Pradesh—to resolve problems, such as the provision of land, that have bedevilled efforts to improve infrastructure. States could soften labour laws, say, to encourage manufacturers to expand. Reformists might also redirect a big rural jobs scheme to the tasks of building dams and roads instead of merely using it as welfare.

In one area, foreign policy, early signs of dynamism are apparent. South Asian leaders, including Pakistan’s prime minister, Nawaz Sharif, have been invited to the prime minister’s swearing-in on May 26th. Mr Sharif was notably quick to congratulate Mr Modi on his win, and last year invited Manmohan Singh to his own inauguration. He might struggle to persuade Pakistan’s anxious army to let him travel to see Mr Modi so early. Either way, there are encouraging signs that Mr Modi’s team is open to engagement, despite the killing of an Indian soldier in Kashmir this week. More modestly hopeful were noises from China, where a think-tank described Mr Modi as “like Nixon”, a complimentary reference to the former president’s friendliness to Beijing, rather than to Watergate.

China, however, will be less cheered by Mr Modi’s gushing goodwill towards Japan. He described his “wonderful experience” working with the country when he was chief minister, his gratitude towards Shinzo Abe, its prime minister, and expectations of a strong “mutual strategic partnership”. Japan, unlike America and Europe, preserved friendly ties with Mr Modi even after the riots in Gujarat in 2002. Japan, too, could be a source of the investment that Mr Modi needs for his infrastructure overhaul. He also spoke to America’s president, Barack Obama, which might help ease a recent diplomatic spat between the two countries.

Foreign-policy figures say an early priority will be building strong relations in Asia. That is partly because economic plans are expected to do most to determine Mr Modi’s international efforts. He is short of foreign experience, but at least as chief minister in Gujarat he made much play of welcoming foreign firms. He also took occasional trips—notably to Japan and China—to seek more trade and investment.

If outsiders seek a high-profile project to win his favour, one option would be to offer help with his promise to clean the Ganges. That requires building new sewage systems in dozens of towns and cities on its banks, closing tanneries and factories, and getting state governments to co-operate. An emotional Mr Modi made cleaning the river a test of his leadership. He has five years to prove himself.


Reviving India’s economy

Modi’s mission

The new prime minister has a good chance of resuscitating the country’s underperforming economy

May 24th 2014 | MUMBAI | From the print edition

INDIA, a giant economic mediocrity, is cursed by having too many economists. Its outgoing prime minister, Manmohan Singh, has a doctorate from Oxford, ran the central bank in the 1980s and led the liberalisation programme that India put in place in 1991 after a currency crisis. Yet as prime minister Mr Singh had little grip or public support, serving at the pleasure of Sonia Gandhi, the populist leader of the Congress party. By the end of his ten-year term he admitted he had failed. In August, as the rupee tumbled, he addressed a gathering of India’s policymaking elite at his house in Delhi. The economy faced “very difficult circumstances”, he whispered.

Mr Singh’s successor could not be more different. Narendra Modi’s economic views have been formed while running the business-friendly state of Gujarat for the past 12 years. Asked some time ago about his economic influences, he described his homespun framework, jotting diagrams on a pad as he spoke. He has studied Singapore and China, but thinks that “India is a democracy and has different requirements”. Striking a balance between farming, small firms and global companies is required, with limited but muscular administration and populist appeal: “Men, machines and money must work together.”

Having run Gujarat well, Mr Modi now faces the far harder task of running India. He has big advantages—administrative competence, control over his party and a majority in Parliament—that should ease decision-making. Unlike Mr Singh, he has also campaigned and won on a platform of aspiration and economic reform. India needs “less government and more governance”, he declared on the campaign trail.

The immediate situation is precarious, notwithstanding a post-election surge in the stockmarket. India suffers from stagflation. Growth is 4-5%, half the level at the peak, inflation is 9% and rising (see chart), industrial production is declining and the public finances are a mess. Although the current-account deficit has narrowed to below 2% of GDP, it is flattered by a de facto ban on gold imports and could yet blow out to scary levels again.

As The Economist went to press Mr Modi had not picked his finance minister. The front-runners are Arun Shourie, a journalist and ex-minister, and Arun Jaitley, an urbane stalwart of Mr Modi’s Bharatiya Janata Party. Both are able. As well as dealing with the immediate mess, Mr Modi and his finance minister must grapple with India’s long-term trajectory. It is distinctly wobbly.

A decade ago the country seemed destined to rival China. Annual growth was heading towards 10%. India had the ingredients that had made East Asian countries richer: a growing population and rates of saving and investment of over 30% of GDP that would finance factories and roads, lifting the economy’s potential. Unlike most East Asian counties, India has never had a strong state, but instead, optimists argued, it had brilliant entrepreneurs who could wheel and deal the country to prosperity.

What went wrong? The raw inputs of growth—people and capital—have been deployed badly. The rates of savings and investment have dipped and their mix has deteriorated. High inflation has led households to buy gold, shifting money away from the banking system where it can be productively employed. And a mixture of bureaucracy, excessive leverage, incompetence and corruption has led private companies (whose spending tends to have the most bang per rupee) to halve their investments as a share of GDP. What has been invested has often been tangled in red tape and graft.

India’s improvised miracle has hit its limits. Energy and chaos only go so far. Although poverty has fallen and there are pockets of dazzling wealth, much of the economy is primitive. Infrastructure is decades behind China’s. Industries that are close to the state involve corruption on a grand scale, with bribes paid to politicians and officials over the past half decade of anywhere between $4 billion and $12 billion. Only 3% of Indians pay income tax, leaving a hole in government finances.

About 90% of jobs are informal, leading to widespread poverty. Agriculture is feudal and food shortages cause inflation. India is meant to be industrialising but manufacturing contributes only 15% of GDP and 11% of jobs, and its share has been falling. A majority of India’s 50m manufacturing workers toil in facilities without electricity. A droopy rupee means India has been running to stand still. At market exchange rates India’s GDP remains smaller than Italy’s and ranks tenth in the world, about the same as in the 1980s.

There may be no one better qualified than the forceful Mr Modi to kick-start the investment cycle and slay stagflation. In his first month Mr Modi will beef up the prime minister’s office and knock heads together to get stalled projects moving. Some are embroiled in legal disputes which he will not be able to override; others are a matter for state governments. But still others are easy pickings. Roads, rail, coal and gas are areas where a decisive central government will make a difference, says Sanjeev Prasad, of Kotak, a bank.

Cometh the hour, cometh the man

In his first quarter in office he must tackle the bloated fiscal deficit, which has fuelled high inflation. Book-cooking by the outgoing government means that the true deficit is higher than official forecasts—at perhaps 7-8% of GDP (including the states). Mr Modi will trim spending on wasteful subsidies of fuel and food and defer the rolling out of welfare schemes passed by the last government in its dying days. A budget will offer a chance to reverse the previous government’s retroactive tax claim on Vodafone, India’s largest foreign investor. Doing so would soothe the nerves of foreign firms.

In his first year, Mr Modi must stabilise India’s rotten banks and tame inflation. Recapitalising state-run lenders will cost up to 5% of GDP and will involve taking on the bureaucracies that run them and the powerful industrialists who are sitting on bankrupt projects that need to be written off. It will be a test of Mr Modi’s resolve. Another test will be his stance on interest rates. The boss of the central bank, Raghuram Rajan, wants a tough new inflation-targeting regime. Mr Modi should back Mr Rajan, who is keen to stay in his job. After all, high inflation is partly why Congress lost.

A good first year will revive animal spirits. Ajay Piramal, a tycoon with a billion dollars in gross cash, is now looking to invest again. The election result is “a good sign of the maturing of the electorate,” he says. Within two years the economy could be growing at close to its potential rate. Chetan Ahya of Morgan Stanley, a bank, forecasts growth of 6.8% by the quarter ending in March 2016. If Mr Modi achieves all this, he will have done the easy part.

In the long term he must raise India’s growth rate towards 10% and ensure that expansion starts to generate decent jobs. You do not become a superpower by creating an ever bigger army of underemployed drivers, idle security guards and ragged peons. India’s median age is 26, and every year for the next decade 10m people will enter the workforce. That requires a new vision for India and deeper reforms.

Critics argue that this is a step Mr Modi will be unable to make, and that he offers only a limited form of crony capitalism, with chummy deals struck with tycoons. This is unfair: many firms in Gujarat say that the bureaucracy works well, that the courts are fast and that graft is non-existent. The state has some impressive bureaucrats, ministers and institutions.

In any case India’s new economic plan will have to be home-grown, because simple prescriptions do not work. Outsiders often argue that all India needs to do is open up its economy and shrink its public sector. But the state is too puny in many ways: it is unable to enforce contracts and cannot afford to spend enough on infrastructure. The big impediment to foreign investment is not legal restrictions (most sectors are already open) but the same nightmarish business conditions that annoy local firms.

What might Mr Modi’s long-term plan look like? Some things are obvious. The solution to India’s fiscal problem (it has not run a budget surplus since independence in 1947) is to expand the tax net. A proposed direct-tax code, and a goods-and-services tax (GST), should achieve this. With more revenue, the state can build more infrastructure: the experiment over the past decade of getting the private sector to do the heavy lifting has had mixed results. The GST also helps make India a single market by replacing a myriad of local levies. The bureaucracy needs to be reformed; Bimal Jalan, a former central-bank governor, says the number of ministries should be cut.

But the big question is whether Mr Modi can make India a global hub for labour-intensive manufacturing. Japan, South Korea and China got richer by employing unskilled farmers in factories. The timing is perfect for India. Labour costs are rising in China; Japanese firms are shifting production from China because of military tensions; and the rupee has fallen, making Indian workers more competitive.

Sadly, it is hard to find an Asian boss who is interested. William Fung of Li & Fung, the world’s biggest sourcer of clothes for Western retailers, says activity is shifting to Bangladesh, South-East Asia and Africa. Zhang Ruimin, of Haier, a big manufacturer of household appliances, says he wants to automate his factories in China. Fujio Mitarai, the boss of Canon, plans to tilt production back to Japan and also automate it. When India is mentioned he raises his eyebrows.

About half of China’s exports are made by foreign firms. India could try relying on indigenous manufacturers instead. But they usually prefer to use machines, not employ people. They are also subscale. Mahindra & Mahindra, India’s local car champion, has a research-and-development budget that is 1% of Volkswagen’s.

Some argue that India could rely on a “trickle-down” effect from its sophisticated IT, pharmaceutical and high-tech manufacturing industries. They employ only a few million people but generate exports worth 7% of GDP. As the owners and staff of these firms spend the value added they have earned, they might create jobs.

It may be possible on paper, but some are sceptical that trickle-down can deliver a widespread improvement in living standards quickly. Arvind Panagariya, an economist Mr Modi listens to, argues that such an approach will not transform India. “Manufacturing is of the highest priority…In ten or 15 years’ time India ought to be where China is today.”

Narendra the great mender

Can Mr Modi achieve this? In a technical sense he will have to transform the supply of the inputs of production. Most factories find it far too hard to get land, labour and energy. All three inputs are bound by a mesh of restrictive rules and bureaucracy, vested interests and corruption. One option would be to devolve power over these matters to the states, and hope that they compete among each other to raise standards, much as Gujarat has done. Another would be for Mr Modi to build momentum over several years for a wholesale recasting of the rules, driven by the centre. Either way, it will require nothing less than a complete change of outlook for a country that has forgotten how to do business simply.

Sitting at his desk in Gujarat, Mr Modi said that when he first took charge of the state’s economy, “I thought: the sky is the limit.” A similar ambition today would serve India well.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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