Poll results will have no major impact on reforms agenda

In the recent Assembly elections, the ruling party at the centre, the BJP, has emerged stronger. It achieved outright majority in two states Uttar Pradesh (UP) and Uttarakhand while claiming the position of second largest party in Manipur where it hardly had any footprints earlier.

The win of 325 out of total 403 seats in UP was much higher than any of the exit poll predictions or BJP’s own expectations – huge improvement from the tally of 47 seats in the 2012 assembly elections. The incumbent Samajwadi Party (in alliance with Congress) came in at poor second with 55 seats.

The Congress, on the other hand, did have some victories to celebrate as it gained two-thirds majority in Punjab defeating the ruling Akali-BJP alliance and emerged as the largest party in both Goa and Manipur. The market surged and the rupee strengthened immediately in response to the election results in UP indicating higher investors’ confidence.

The win in UP was considered an important one as it is the largest Indian state with 16% of population, and has maximum number of MLAs and MPs. Second, the state elections were seen as the litmus test for continued popularity of Modi government which is at a half-way mark of its tenure, two years ahead of the general election in 2019. Third, election results were considered as a referendum on Modi’s reforms, particularly after demonetisation.

The recent wins will not dramatically improve BJP’s Rajya Sabha seat share math immediately as te Upper House is a permanent body where one third of the members retire every second year. The ruling party had been facing some difficulty in passing important reform bills as it does not have majority in Rajya Sabha.

The BJP and its allies now account for 78 out of 245 seats (32%) in Rajya Sabha – far below the halfway mark. The five states that went to polls have 43 seats in total with UP alone accounting for 31 seats. Only one non-BJP seat will come up for re-election in 2017, 10 in 2018, none in 2019 and another 11 in 2020, mostly from UP. So, BJP’s dramatic win will not translate into major gain. The seat share will improve slowly and remain below the majority mark till 2019.

Having said that, the BJP has managed to pass some important legislative reforms like Bankruptcy Act, GST etc, despite its lack of majority in the Rajya Sabha. So, the election results will not have any major impact on reforms agenda. However, these wins will, for sure, embolden the ruling party to pursue more structural reforms in next one year before the next general election in 2019.

The impressive win also would not change the macroeconomic scenario. The investment cycle has not revived yet, capacity utilisation remains below par and credit growth is at record low. With stretched corporate balance sheets and NPA-burdened banking sector, private investment is not expected to recover anytime soon.

The possibility of any further rate cut diminishes as inflation moves north. The central government has budgeted increased infrastructure spending with emphasis on low-cost housing which is expected to push public investment and increase employment.

Export growth has revived in the last couple of months but it is still stuck in low single digit — nothing to write home about. With increased global volatility and tepid growth, external factors will not pull up domestic activity. So, GDP growth will be flying on single engine — consumption. It is expected that good monsoon, lower interest rates and Seventh pay commission recommendations will help consumption.
The recent GDP growth in the September-December quarter at 7% obviously did not capture the impact of demonetisation on the cash-based labour-intensive informal sector. It will be unreasonable to expect a sharp growth recovery. Growth recovery is expected to be rather U-shaped.

The recent high frequency data do indicate that the worst is over and the economy is recovering fast from the drag of demonetisation. The industrial production growth, PMI numbers, export growth and car sales have all improved. Moreover, India still continues to be one of the fastest growing major economies.

Macro-stability

The macro-stability remains stable with low inflation, narrow current account and fiscal deficit and adequate foreign exchange reserves. Increased revenues from ‘Income Declaration Schemes’ might provide additional space for higher spending on social schemes and bank recapitalisation. With rising numbers of BJP chief ministers, it would be easier for the central government to push for land and labour reforms at the state levels under cooperative federalism.

Uttar Pradesh is the biggest state in India but it has failed to achieve its potential growth under successive previous state governments. With per capita income lower and poverty rate higher than nation average, UP has been a drag on overall growth rate of India. The impressive win of BJP in UP clearly indicates the popularity of Modi among the poor of the state.

The BJP has been successful in transforming the image from `suit-boot-ki-sarkar’ (as branded by the opposition) to pro-poor government - effectively taking the left of centre space from the opposition. The BJP will try to strengthen its position in next state elections in Himachal Pradesh and Gujarat later this year and Karnataka in the first half of 2018.

Aspirational India does not need freebies. Improved infrastructure, skill development and job opportunities are the basic requirements. Uttar Pradesh has voted for development. The new chief minister of UP will have huge responsibility as he will have to meet these high expectations of the people of the state. If BJP manages to turn UP into one of the fastest growing states, it will easily help India achieve the double-digit growth rate so desired.

(The writer is a visiting fellow in Pahle India, research scholar at IIFT and adviser at Policy Monks)