India elections and beyond: UKIBC view by Richard Heald

31 May 2011052011
Richard Heald, Chief Executive, UKIBC

By Richard Heald

Much comment has been given to the recent elections in West Bengal, Tamil Nadu, Kerala and Assam. Interesting though these are, in India, the focus now is on how the government can leverage these to restart their agenda, particularly in the forthcoming period, until the middle of June.

India's economy grew by just 7.8 per cent in the fourth quarter ending March this year - giving rise to fears of a slowdown in the economy. This decline is mainly due to poor performance of the manufacturing sector and compares to 9.4 per cent growth in the same three-month period of the previous fiscal. However, economic growth, as measured by the Gross Domestic Product (GDP), improved to 8.5 per cent in 2010-11 from 8 per cent in 2009-10 due to better farm output, construction activities and financial services performance.

While, India's economy is still posting relatively robust growth, second only to neighbouring China's among major economies, and its domestic demand continues to grow on the back of rising income, economists and government officials have recently revised downward their expectations for the GDP in the current financial year. The reasons cited for this include rising crude oil and other commodity prices, and doubts about economic recovery in developed nations.

As such, the political will and hence, the economy needs a new impetus. There is a general assumption that the election results have given the UPA coalition and the Congress Party the opportunity to introduce measures to stimulate the economy, ink the EU - India FTA and address key issues such as infrastructure, retail and services. At the same time, there is a wide spread expectation that the PM will use this period to re-shuffle the Cabinet in a more decisive fashion than in January of this year. Plus he also has to replace six secretaries of key ministries in June, including the all-important Cabinet Secretary and Finance Secretary. The aggressiveness with which he moves will define the coalition UPA Government's remaining tenure.

But will he? The precedent is not good. Moreover, the Congress Party was not a clear winner in the recent election round. Mamata Banerjee's win in West Bengal has strengthened the Coalition but not necessarily the Congress. The Congress has not benefitted from the ejection of the scandal hit DMK in Tamil Nadu unless the Congress can form a new alliance with the victorious AIADMK. In Kerala, the Congress won a small majority but this is scant reward to the significant commitment made by the Party in the State. And in Assam, the win was due to the popularity and efficiency of the State Chief Minister rather than a vote of confidence in the Centre. Finally, there is an increasing danger that Congress's focus will start to slip to next year's elections in Uttar Pradesh which have already started for all practical purposes.

Prime Minister Manmohan Singh will have until mid-June to make his announcement - before the Monsoon Session of Parliament commences. The most persuasive argument for him being bold is that he will wish to protect his legacy as the Finance Minister who heralded in the new era of Indian prosperity and who then presided over its consolidation as Prime Minister.

But do these domestic arguments matter to UK business? The answer is "yes". Interest from overseas companies is predicated on measures to ensure continuation of a vibrant internal economy and as well as a further relaxation in certain FDI limits. This period gives the UPA government an opportunity to make announcements on the outstanding issues concerning Vodafone, Cairn-Vedanta and Reliance-BP; any one of which will have a significant impact on the international perception of India as a business friendly environment.

India remains a land of opportunity. India's continued rise is inexorable. It is the rate of growth which can be accelerated by further liberalisation but as was told to me just yesterday, "we Indians never fix the roof when the sun is shining".

Perhaps the current headwinds will just prove the catalyst for inspired decision making.

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