What foreign businesses can or should expect (or not expect) from India’s 2019 general election?

India, the world’s largest functional democracy is in election mode. The country will be having its general election between April 11 and May 19. Over 900 million voters are likely to use their voting rights to elect 543 members for the lower house of Indian Parliament. The political party or a coalition of political parties having the support of at least 272 of them, will form the next government. 

Along with the general election, India’s election commission is also conducting state elections simultaneously in Andhra Pradesh, Arunachal Pradesh, Orissa and Sikkim. These state elections are not getting much attention either from media or the business community but they will have impact on composition of the upper house of Indian Parliament and in turn on the fate of crucial reform bills that require the constitutional amendments and in turn the concurrence of Rajya Sabha .

Key concerns

Along with politicians and political analysts, the business community and investors (both existing or prospective) are trying to understand and predict which party or coalition has the best chance to win and form the next government. Business interests including stock markets in general prefer political stability and regulatory certainties that come with stable governments. So, they are worried that on May 23 when the results of the parliamentary election would be out, India might get a hung house and unstable government.

Most opinion polls seem to suggest that NDA led by the current PM Modi may lose over 100 seats from its tally in 2014, but it will remain the top scorer and most likely should be able to form the next government with a little help from regional parties. The UPA led by Rahul Gandhi will certainly improve its tally from last time, yet, it is likely to fall short of a decent number to have any chance at government formation despite the hype. The problem is that opinion polls or exit polls for that matter have mixed record in predicting outcomes of Indian elections correctly. That’s the reason, investors (whether of Indian or foreign origin) would be nervously waiting for the actual election results disregarding what opinion polls are saying. 

Whatever happens on May 23, with competitive populism aggressively being pursued by both the mainstream parties - BJP and Congress, the right question to ask is: will India be able to meet its fiscal targets, keep inflation low and ensure macroeconomic stability? Will India be able to afford a new income support program for poor farmers? The opposition, Congress Party wants to extend it to all poor households (20% of the total Indian households at 250 million i.e. 50 million) to be paid INR6000 a month that is likely to cost INR3.6 trillion rupees a year if voted to power. This growing populism will have fiscal implications for sure.

At the close of fiscal year 2018-19, direct tax collection was INR 11.5 trillion - short of INR500 billion despite all kinds of manoeuvres such as cajoling PSUs to pay extra taxes that could be adjusted or refunded next fiscal. On the other hand, because of a whopping 16% (YoY) increase in March realisation, the overall GST collection in FY 2018-19 has surpassed the revised target: INR11.77 trillion against INR11.47 trillion. All these things convince that federal government would be able to meet the fiscal deficit target of 3.4% of GDP in FY2018-19. 

However, things may be difficult next fiscal when the government led by either NDA or UPA will have to implement their pet populist schemes, income support in particular, unless decide to end some of the existing schemes. Besides, the interim budget FY 2019-20 has aimed to increase income tax collection by 21% that will not be easy to achieve. Similarly, the average monthly receipt from GST grew a little over 9% (YoY) in FY 2018-19, yet the interim budget 2019-20 targets it to grow by 18%. That doesn’t sound realistic. Having said this, meeting fiscal deficit target would also depend upon actual realisation from disinvestment, higher non-tax revenues, dividend from RBI along with adjustment in government expenditure. That last (adjustment in government expenditure) is certainly going to be difficult to pool through. The increasing focus on entitlement schemes such as income support for poor, housing for all, farm loan waivers and subsidised food program are manifestations of more and not less spending by the government.

On the positive side, growth slowdown especially in China and the EU should keep crude oil prices in check. Along with that, broader supply glut in farm produce market should keep food inflation low. With the US Fed deciding to keep interest rates unchanged, RBI is likely to be accommodative. Lower interest rates, in turn would be investment positive.

India’s biggest worry, however, is an ever-expending list of un-prudent sectoral regulations be it fixation of floor prices (agriculture), inverted duties (textiles and electronics) or cross-subsidisation (power) that will continue to frustrate businesses. With populism remaining the major theme for policy makers irrespective which party or alliance comes into power amidst hyper nationalism, one can expect extension of price control (or relatively less market distorting trade margin caps) to more sectors, not only healthcare, but also to agro-chemicals and seeds, for instance. Under pressure to do something, the government may further increase protection to industries such as steel and aluminium to aid Make-in-India and boost local jobs. That however doesn’t mean such policies will work. Instead, it will dampen the prospects of downstream industries such as automobile, real estate, heavy machinery and equipment.

Given the widespread discontent among rural voters suffering from sharp correction in farm produce prices (as well as cattle) and inter-state barriers to trade in agricultural commodities leading to low price realisation, it’s interesting to know how the next government will deal with it. Agriculture, accounting for over half of the country’s workforce, remains the most unreformed sector with low productivity and excessive dependence on government, its key features. Unshackling agricultural thus, remains the key to improve the condition of rural India.  

Despite promising to double farmers income, the Modi government has so far avoided crucial reforms. It has rather extended the coverage of flawed market price support program, for instance, to almost all crops even if that’s not effective. The government had started a game changing reform action to create a nation wide online market for farm produce. However, it grew complacent after that faced with opposition from vested interests. I think, whoever, comes to power after May 23, will be forced to undertake some really tough measures starting with much needed marketing reforms to fixing input subsidies. Likely loss in a WTO dispute over the country’s cane price support program may induce the next government to finally start agrarian reforms starting with the sugar sector.  

Yet another expectation is reform of labour regulations. Despite creating hype, Modi government has not done much about it in its current term. Rather it floated the idea of an ill-conceived national minimum wages. Given the widespread differences in living cost and low labour productivity in general compared to comparable countries such as Vietnam, a common floor wage doesn’t make any sense. However, amidst rising income inequality in the country and pompous life styles of rich, demand for hikes in minimum wages is not going away anytime soon. However, rationalisation of labour regulations and flexibility on hiring and firing can be expected from the next government and that’s good news. Jobless growth and rising youth unemployment remains one of the top policy challenges for the country so businesses must be encouraged to hire more without being too much worried about their inability to retrench excess workers.     

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