A Macro View of Indian Elections

Last week’s state elections in India were stunning in their message. The first message was the high voter turnout. As Live Mint reported,

  • “While
    Delhi registered a turnout of 65.13%, a steep increase from 57.58% in
    2008, Rajasthan and Madhya Pradesh recorded 75.2% and 72.66% turnouts,
    respectively. In Naxal-hit Chhattisgarh, an average of 77.32% of voters
    turned up to vote over two phases. In the north-eastern state of Mizoram, turnout was the highest at 80.29%.”

We are not surprised. We have never seen such frustration, such despondency, such lack of confidence in the future as we saw in India last month. There is a feeling of helplessness in the face of chronic high inflation and high unemployment. You hear a palpable yearning for a leader who can save India.

And people think that leader is Narendra Modi, the chief minister of Gujarat. Whether in Mumbai or in deep south, his name is increasingly heard as the man who made Gujarat successful, the man who brought electricity & water to Gujarat, the man who reduced corruption in Gujarat, the one man who might be able to put India on the right track.

That is not just the hope of the common Indian. It is also the hope of India’s corporate sector and of global investors. As even the usually anti-Hindu James Crabtree of London-based Financial Times put it:

  • “Politics provided the latest boost as the Sensex touched a record 21,484 on Monday after a strong showing in state elections by the opposition centre-right Bharatiya Janata Party, led by Narendra Modi, prime ministerial candidate. Excitement over the opposition leader appeared to hearten domestic and foreign investors alike with India’s markets enjoying their largest daily portfolio inflows in more than two months following his successes.”
  • “On Monday, something like $1bn came in, which was a great day for all of us,” says Kaku Nakhate, chief executive of Bank of America Merrill Lynch in India. “People were expecting BJP to win but not with that kind of clarity . . . So you are seeing funds that are already invested in India, but were underweight, pushing in more money”

The rally in the Sensex is about hope for the future. It is not a reflection of the current state of the Indian economy which remains caught between the twin pincers of  high inflation and weak industrial production. Sharply higher food prices drove up retail inflation to 11.24 percent in November from 10.17 percent in October.

This single fact might tell the story why both rural India and urban India might be in sync with each other now. The emergence of small towns has bridged the traditional gap between large urban mindsets and rural mindsets. And inflation & resultant decrease in spending power is now being felt alike in both urban and rural India.

Big Difference between 2009 and Now

The Congress Party has been traditionally strong in rural India while the BJP has derived much of its support from urban or semi-urban trading class. This has been a significant electoral advantage for the Congress Party. This traditional bifurcation was put aside in last week’s state elections in India. And the reason might be the pure reality of an electocracy – that people always vote their personal and family interests.

The story underneath India’s economic story has been the rural economy that has outpaced urban economy for almost a decade. This difference accelerated in late 2007 and reached its peak in July 2011. Greater growth in rural India might have been the main reason for the greater than expected victory of Congress Party in 2009.

The story is very different now. Listen to what consumer companies are saying:

  • Jayant Singh, executive vice-president of marketing at GlaxoSmithKline Consumer Healthcare. – Rural (market) is slowing down dramatically….Even though rural markets have fared better than urban (ones), they are not where they used to be and it’s showing, … The past three-four quarters have seen a downward trend…though rural (markets) have been a bit better (off than urban markets). But in this quarter, even rural markets are creating a bit of a problem.”
  • Manoj Menon, group business director at IMRB InternationalConsumers in rural markets are down-trading to smaller stock-keeping units or postponing more expensive purchases. For instance, the shampoo market is seeing more sachet off-takes than bottles,”
  • Sunil Duggal, CEO of Dabur Ltd. – “Even rural growth—which was really shoring up the aggregate growth—has come off now. The rural growth is now more or less equal to growth rates in urban market, and both of them are now in the low single digits. This has been happening in the last four quarters and the trend is downward. … I think the demand side is what is worrying us and that’s harder. … There has to be more reform and better execution. There is too much money locked up in non-productive assets and, I think job creation is the only way you can generate income without fuelling inflation. Otherwise you keep giving money away and at the end of the day inflation eats up into a lot those gains.”
  • N. Krishna Mohan, CEO, Emami India Ltd – “How inflation will play out in the next couple of quarters will play a critical role in ascertaining demand,”

The Congress Party has devoted all its resources to “giving money away” to rural poor who can see that income gain eaten up by inflation. The real story as the Dabur CEO put it is job creation.

Most labor stories about India describe the large organized sector. What is rarely described is the unorganized sector that employs 80% of all manufacturing workers in India. Since its peak was in July 2011, India’s industrial output has declined or grown at very low rates in almost every month since then. That has put the small-scale or unorganized sector in a deep crisis. This sector spans the entire gamut of India, from urban to semi-urban to rural. Most workers in this sector are migrants from rural areas who send money to their families.

Whether you are middle class or poor, whether you live in urban or rural India, you face the same problem. Your buying power is being eroded before your eyes on a daily basis and your future is in greater doubt than ever before. Your country has no sense of direction. This situation is making people yearn for a leader who can deliver jobs, growth, curtail inflation and help establish a more livable law and order situation.

This is why people may be voting for BJP and Narendra Modi. Even
in the deep south, you hear people say Modi improved Gujarat and hopefully he can help us. This is why Modi’s basic message is only “vikas” or development can help India and he is the proven man to deliver “vikas”. This is backed enthusiastically by the Indian corporate sector which has virtually been on strike for two years.

We have not seen a truly national election in India since 1971, the year Indira Gandhi swept away the opposition with her “Garibi Hatao” or Remove Poverty message. Will the 2014 election be another truly national election on the “vikas” or development mantra? We will find out together in a few months.

All Politics is Local

This old proven adage was demonstrated in Delhi when AAP, the new “common man” party, won 28 seats to come in a close second to BJP. This important victory might well propel AAP to become an all-India party with a base of major metro middle class voters. But that is in the future. They are unlikely to be a nationwide factor in the next 3-5 months.

Unlike the four states that went to polls last week, much of south India is dominated by regional parties. Their support of Modi will be an important factor in the upcoming national elections. Politics is about winning and every state needs a friendly prime minister. So if they think Modi is likely to win, then they are more likely to support him than not.

That leaves the two major north Indian states, the huge Uttar Pradesh (“UP”) and Bihar. This is where the near term future of India will be decided. With 200 million people, an independent UP would be the 6th largest country in the world, even larger than neighboring NonPakistan. The Congress has not won Uttar Pradesh since 1989 and the last BJP rule ended in 2002. UP has been dominated by regional parties who win mainly on identity politics of coalition of ethnic groups & communities.

Will UP-Bihar vote its pocketbook or stay ethnically loyal is the key question in the upcoming election. If Modi-led BJP can win enough seats in UP-Bihar, then he will become the unquestioned leader of a united India.

The Nightmare Scenario

What happened in Delhi is a wonderful political story of hope and change. The reality is that Delhi voters delivered two winners – BJP & AAP. Neither won enough to form a government on their own. BJP decided to remain in opposition while AAP, at this moment, seems willing to consider forming a coalition government. If it doesn’t, there will be another election.

But the cute Delhi story would be a nightmare for India if replicated nationwide. And that is a serious possibility if the BJP does not win an outright or close to an outright victory. We could see a repeat of the 1989-1991 debacle when India saw weak decrepit men fighting desperately to become Prime Minister just for a few months. 

That will result in another nationwide election within two years. But these two years will see an exodus of capital from India, both foreign and Indian. We shudder to think what might happen to both inflation and economic growth in this scenario. 

Next 3-6 months are going to be critical for India. So keep your hopes up and your bets small.

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