THE election in India unleashed the usual media platitudes about the nobility of the people’s judgment in the world’s biggest democracy. For investors and businesses, however, the defeat of the most economically successful government in the country’s post-independence history raises some very troubling questions, not only about India, but about the prospects for market-oriented reform and globalisation throughout the developing world.
The Bombay stock market, which plunged by a record-breaking 21 per cent in a day after the election, cheered up last week when it became apparent that the new Prime Minister would not be the inexperienced Sonia Gandhi but the brilliant and incorruptible Manmohan Singh. Dr Singh has been justly honoured by politicians across the political spectrum as the “architect” or “father” of India’s economic reform programme, which he launched on being appointed Finance Minister immediately after the assassination of Rajiv Gandhi in 1991.
Mr Gandhi’s death left India facing economic bankruptcy, as well as political chaos, and Dr Singh astonished the world by restoring order to government finances through cutbacks in wasteful public spending, and freeing private businesses from the bureaucratic restrictions and import controls known as the “Licence Raj”. His unexpected emergence as Prime Minister has reassured markets that the Government would continue to encourage the private sector and integrate India into the world economy, rather than reverting to the bureaucratic, protectionist policies associated with the Congress Party before 1991.
But could the stock market’s initial panic turn out to have been the more prescient view? The obstacles to Dr Singh’s success seem much higher than they did even a month ago. Indeed among the new Prime Minister’s first pronouncements on taking office were reassurances to Congress’s socialist coalition partners that he would shelve the previous government’s planned privatisations of state banks and large industrial companies. Another casualty will be reform of India’s restrictive labour laws, which have made it almost impossible for large businesses to dismiss workers and thus helped to ossify the industrial structure.
The question is whether Dr Singh, a quintessential technocrat, will be able to transfer his economic skills to the messy politics of managing a coalition of feuding parties with wildly conflicting ideologies and agendas. His main problem — and in trying to keep the Indian economy on its recent strong growth path — will lie in his lack of a personal mandate, since the election result was partly a triumph for the Gandhi family and mainly a mandate for the opponents of economic reform.
Although Western commentators mostly welcomed the election result because it swept away a Hindu nationalist government that was held responsible, at least in its early days, for religious bigotry and inter-communal violence, the fact is that social and religious issues seemed to play very little part in the BJP’s defeat. One of the few states where the BJP retained its majority was Gujarat, the scene of the worst religious violence in recent years. And the BJP’s loss of seats in this region was mainly explained not by a revulsion against religious bigotry, but rather by a dramatic reduction in the turnout of Hindu extremists, who apparently felt that the BJP had become too technocratic and had abandoned its nationalist roots.
The BJP downplayed its sectarian and Hindu roots and campaigned on its economic management record, using the slogan “India Shining” to highlight the prosperity of the cellphone-toting middle classes and to celebrate the country’s rapid emergence as an economic and technological power. But by common consent it was precisely this emphasis on economic modernisation, crystalised in the “Shining” slogan, that provoked an unprecedented anti-government backlash among rural voters, who saw nothing dazzling in their villages or their impoverished lives.
A rejection of capitalist reforms was arguably the clearest message delivered by a large majority of the 700 million voters. This is a message that the world had better take note of, since this election can be viewed as the biggest and most democratic referendum conducted on globalisation and market reform.
The biggest benefits of pro-market reforms tend to go to the better-educated urban middle classes, rather than the poorest rural voters. But this order of priorities appears no longer acceptable to voters, as Dr Singh stated in his first reactions to the vote: “The first priority of any new government must be to tackle rural poverty and backward agriculture this is the inescapable lesson of the election result.” The election’s anti-capitalist message was evident not only from the overall result but even more from the regional voting. The largest voting swings occurred against the politicians who were running the most dynamic state economies and were identified with the most vigorous pro-market reforms.
The clearest possible evidence of an anti-capitalist “Peasants’ revolt”, as many commentators in India have described this election, came in the crushing defeat of regional leaders in the two states that symbolised the technology-driven, market-oriented “new India”: Chandrababu Naidu, chief minister of Andhra Pradesh, and S. M. Krishna, chief minister of Karnataka. Both these states failed to benefit from the monsoons that raised farmers’ output and lifted their mood in the rest of the country. Thus their leaders suffered the anti-reform backlash. Krishna’s defeat was particularly significant because he was a Congress politician who should have been returned with an increased majority as part of the pro-Congress trend. Instead, he was ousted by rural voters who resented the perceived pro-urban bias of the state government. Thus Karnataka, India’s showcase for technology and economic reform, became the only state where Hindu-nationalists were swept into power by the anti-capitalist tide, which turned out to be even more powerful than the nationwide trend against the BJP.
By contrast, the governors of the backward states most associated with resistance to market economics and their atavistic support for Nehru-Gandhi socialism were largely untouched by the “anti-incumbent” revolt. Thus voters re-elected the populist, anti-reform leaders of Uttar Pradesh and Bihar, the two most impoverished states. The governments of these backward, stagnating regions were returned to power despite, or because of, their rejection of reform.
In sum, this election may not be a fatal setback to India’s economic reform process, which will presumably continue at least as long as Dr Singh remains in power. In addition, the imperatives of economic growth and technological development will be created by geopolitical pressures above all the country’s fear of falling irretrievably behind China. But the election suggests that support for market-oriented development, along with free trade and globalisation, may be less deeply rooted in India and other poor countries than Western economists and pro-Western local businessmen, financiers and politicians find it convenient to believe.
If globalisation and capitalism do more for the rich and the middle classes than they do for the poor, economic reforms may well be opposed by working class and rural voters even if they make the poor better off, simply because they increase inequality. There can be little doubt that India’s rural voters are much better off today than they were eight years ago, when the BJP came to power, or in 1991, when Dr Singh launched the reform economic programme. Famine is now almost unknown, education and literacy are slowly spreading and healthcare is improving. But nearly half the rural population still lives on less than a dollar a day, hundreds of millions are landless or homeless, and improvements in education, healthcare, rural power, water and transport have been pitifully slow.
The trouble is that accelerating the pace of rural development will require investment on a monumental scale and a firm political consensus in favour of controversial social programmes such as land reform. The present consensus view among development economists and politicians is that boosting economic growth through rapid market-based reform is the best way to generate the economic resources and the political consensus required to make rural development possible. But the question has always been whether poor rural voters would have the patience to wait for the benefits of market-led growth to trickle down from the rich and urban middle classes.
For most of the past decade, this question hardly seemed worth asking one had only to point to the development in China and India to see market-based reform working and lifting living standards of the rural poor. But can a market-based development model, with its inequalities and social resentments, prove sustainable in a true democracy? After this election, the answer is less clear than it seemed a month ago.
