Politics and economics are closely interconnected in any democracy. So it is perhaps no surprise that foreign brokerages and rating agencies are calculating how India’s political future — now that we are just months away from a general election — will determine its economic prospects. Goldman Sachs has made headlines for linking its bullish prognosis — upgrading the rating on Indian equities from ‘underweight’ to ‘marketweight’ — to the possibility of a “business-friendly” BJP government led by Narendra Modi. Less explicitly, but still significantly, the Japanese brokerage house Nomura has referred to probable “positive surprises on the political front”. And for Standard & Poor’s (S&P), any decision by it to revise India’s sovereign credit rating from ‘lowest investment grade’ will depend on what “the government that takes office after the general election does”.
One way to react to such assessments is to attack them for “messing around with India’s domestic politics”, as Commerce Minister Anand Sharma did while reacting to the Goldman Sachs report. But this approach is simply over the top. The views of global investors and rating agencies matter, irrespective of whether their predictions are right or wrong. Also, it goes without saying that which party will form the government will eventually be decided by the people of India, not Goldman Sachs or S&P. But this cannot stop them from even taking positions on who is likely to win. And since their assessments could influence the course of the Sensex and the rupee, they can hardly be ignored.
Having said this, it is far too simplistic to assume that any government headed by Modi, assuming he does engineer a win, will be capable of taking tough reformist economic measures. In the event that the BJP fails to get an absolute majority, which seems well-nigh impossible at the moment, one might well end up with a Modi-led government that is too dependent on allies and the attendant populist pressures to usher in radical reform. There is no guarantee either that a complex country such as India can be run with the kind of decisive hand Modi wields in Gujarat, where he enjoys a clear majority. Conversely, a measure of political stability is no guarantee of reform either. The Congress may have won a comfortable 206 seats in 2009, but UPA-II proved to be totally indecisive on the economic front for the first three years or so. Whatever little reform measures it undertook — from opening up aviation and retail to foreign players to phasing out fuel subsidies — happened well after the initial honeymoon period ended. The fact that these actions were prompted largely by fears of the rupee’s slide suggests that reforms in India tend to be driven by crisis rather than conviction. This needs to change.