ELECTIONS IN INDIA - IMPACT ON BUSINESS
SPECIAL REPORT - June 2004
By
Kumkum C. Dalal
“Your Guide to Sourcing and Doing Business in India”

Recently Indians went to the polls to vote in the Indian general elections. Atal Behari Vajpayee’s BJP party and its coalition government lost the elections. According to the polls this was unexpected: Indian voters brought back the Congress party; the Bombay Stock Exchange fell to its lowest point in 129 years; in both Karnataka and Andhra Pradesh (the home states of high tech cities Bangalore and Hyderabad) the ruling parties fell from grace. On May 22^nd Manmohan Singh became the new Prime Minister of India. The Bombay Stock Exchange was back on course again. The Congress party (like the BJP in 1998) did not win enough seats in parliament to form a single party government; instead the Congress party too has had to form a multi-party coalition government called the United Progressive Alliance (UPA).

Why did the private sector worry? Why did the stock exchange lose ground and regain its confidence after Dr Singh was announced the Prime Minister? What does this election mean for international trade and doing business in India? Does the new government herald the end of economic reforms, end of foreign investments in India and the end of the boom in overseas outsourcing? Not at all. The news is good. The Congress Party had campaigned on a platform that had emphasized more social reforms and more attention to the needs of India’s rural poor. The reason for the private sector panic was due to uncertainty regarding what economic policies the new government would follow. The leader of the Congress party Sonia Gandhi had said nothing to allay private sector fears. However once Dr. Singh became PM the market understood its fears were unfounded.

Here is a thumb nail sketch of the Indian economy these past 15 years and why the new PM inspires confidence. Dr. Singh is a highly educated and accomplished man.  He spent time (late 1950’s) at both Cambridge and Oxford Universities (PhD. in Economics), followed by academic positions at the Delhi School of Economics and elsewhere. As a civil servant, in the early 1980s he was the Governor of the Reserve Bank of India (equivalent of the Federal Reserve in the US) and the Governor for India at the IMF and later the Finance Minister (1991-1996). His credentials are impeccable, his integrity above reproach, fair in his ability to balance too many needs with too little money and very well liked. The economy: India has always had a very vocal private sector that has urged reforms to lift foreign investment restrictions and remove the licensing fees that were rampant in the 1980’s.  At one time foreign investment in India had dipped to a low of $100 million. Fiscal restructuring was finally implemented in 1991-1992 when the Congress Party was in power and Dr. Singh was the Finance Minister. Manmohan Singh was the prime architect of the economic reforms that permitted foreign competition, foreign direct investment, and reduced tariffs and rekindled the latent potential of the Indian entrepreneur. In fact it is Dr. Singh’s reforms that have allowed foreign exchange reserves to grow. When he took office in 1991, the reserves were at $1.2 billion, when he left office in 1996 the reserves had grown to $18 billion. Now foreign exchange reserves exceed $43 billion. The BJP government, since 1998, has nurtured and accelerated these reforms. Given Dr. Singh’s legacy, reversal of economic policies is out of the question. My expectation is that the Congress led coalition government will continue to expand economic reform and foreign investments in India with greater stress on broad based social reform and education.

 What does this election mean to the average Indian living in India? Till about the mid 1980’s economic growth was very slow (the population was growing at the rate of 2 ½ - 3 ½ % while income was growing at ½-1½ %). Due to liberalization, the Indian economy (GDP) is currently growing at 8 % a year. Although the last 10 years saw poverty decline rapidly due to reforms, the boom from IT and BPO outsourcing has benefited directly a very small (about 2 million people) sector of Indian society. Thus the last 14 years of economic growth has created a huge middle class and what Jagdish Bhagwati (Senior Fellow at Center for Foreign Relations and Professor of International Economics, Columbia University, and author of In Defense of Globalization) calls the economics of rising expectations. Neither the rural poor nor most of the middle class – estimated to be 275 - 300 million strong – have been major beneficiaries of India’s growth. This sector, having received a level of improvement, wanted more social reform and more rapidly.

 Here are some facts about the Indian elections that you might find interesting.

• The general elections were conducted over a 3 week period starting on April 20, 2004 and ending May 10, 2004.
• India has a fiercely independent Election Commission. The polls took as long as it did to accommodate the logistics of moving commissioners to voting locations – 700,000 in all.
•  670 million Indians were eligible to vote in a country of 1.1 billion people. The voter turnout was 58% (typically averaging 55-60%.)
• India has six “national” parties and dozens of regional ones.
• The 545 parliamentary seats were being contested by thousands of candidates.
• Unlike the US, India is a parliamentary democracy. The vote is cast for the party not the personality. In this election while Sonia Gandhi remains the leader of the Congress party, Manmohan Singh was nominated by the party to become the Prime Minister.
• 1,075,000 electronic ballot boxes were used. This is the first general election to use an all-electronic method for voting and counting results.

The Indian elections are the greatest testament to the democratic process. The Indian voter - from the middle class and the college educated, to the illiterate and impoverished, from the poor to the powerless - have used the ballot box to get the message to the politicians. No single issue dominated this election. At the end, it was local issues that dominated – different issues in different states.  In the months ahead, balancing the many needs and keeping campaign promises is a formidable task awaiting the UPA government.

 Indian policy makers are fully aware that the last decade’s growth in foreign direct investment and international trade have been major factors contributing to the recent high growth rates. They are not about to reverse these policies. The new Indian Finance Minister, P. Chidambaram, has pledged to continue the policies that have led to India’s economic success and also to increase investment in social and economic reforms, leading to greater manufacturing and employment. The future of foreign outsourcing to India promises to be as favorable, if not more so, than it has been so far.

 Sources:

• The Economist – April, May 2004, various issues.
• Indian newspapers - May 2004, various.
• Bhagwati, Jagdish, May 22, 2004, www.c-span.org. 

Kumkum Dalal is the president of Global Reach Consulting, Inc an overseas outsourcing advisory firm specializing on doing business in India.

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