Indian Politics: Progress Isn't Always a Straight Line

 

NOVEMBER 17, 2015 [EMERGING MARKETS, INDIA, POLITICS]
Charles Wilson, PhD


Electoral defeat for Modi’s BJP in Bihar state represents a setback for economic reforms that is hopefully temporary, but investment opportunities and the tailwinds that drive them remain.

India’s ruling Bharatiya Janata Party (BJP) suffered its second major defeat during the current state election cycle after losing in Bihar, a state with more than 100 million people and many national representatives. The loss is yet another sign the momentum gathered by the BJP during the dramatic election of 2014, in which it took rare control of the lower house, has noticeably stalled. The main driver of the BJP ascent has been Prime Minister Narendra Modi, whose broad popularity appeared to cut across traditional caste and race barriers. It was widely believed that he would bring some of the positive change that he had delivered during his long tenure as Chief Minister of the state of Gujarat from 2001 to 2014. While he has brought several important reform packages devoted to land reform and a national general service tax (GST), they have been stalled due to heated and short-sighted partisan politics that has plagued the Indian government for decades. Many are pointing the finger at Modi’s inability to build consensus or read the tone of congress to make progress on new initiatives. Perhaps this issue was most at play during the recent electoral loss. The opposition deftly used a recent religious rift between Muslims and Hindus, involving several killings of Muslims, to gain favor with Muslims in Bihar State, where they are a significant voting block. Modi was heavily involved in the state election, which is quite unusual for a sitting Prime Minister, and avoided lowering the conversation to religious battle lines, possibly to the detriment of national progress in the near term. As it turned out, voting in the state fell along religious and caste lines, which Modi was hoping to transcend.


The Prime Minister, Shri Narendra Modi addressing the Nation on the occasion of 69th Independence Day from the ramparts of Red Fort, in Delhi on August 15, 2015.

 

While we think recent events are a setback to long-term progress in India, we still think the country has many things in its favor, such as a strong demographic tailwind, a large, educated, English-speaking workforce, and a big pipeline of productivity-boosting investment projects. We continue to think the election of Modi and his BJP planted the seeds of change. But it’s up to him to better consolidate his base of support around his vision for a more efficient and productive economy. The path to progress, of course, is not always straight, but we are still hopeful reforms, at some point, will materialize. In the meantime, we continue to seek investments that benefit from the current structural drivers propelling Indian growth, regardless of the state of Indian political affairs. During periods of pessimism around Indian macroeconomic fundamentals, we have found great opportunities to buy or add to our favorite names in India.

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