Sectarian conflicts can cast a long shadow over India’s economy

The clashes in Manipur and other parts of India cannot be considered in isolation from the drive to propel economic growth.

Even as India looks towards being the fastest growing major economy in the world for the second year in a row, there are ominous signs of political unrest and sectarian conflict having an impact on its global credit standing.

Till now, domestic tensions faced by the Narendra Modi government have rarely been commented upon by international investment agencies. The focus has largely been on the state of the economy, barring during the pandemic when most countries had to deal with internal strife owing to repeated lockdowns and disruptions to normal life. Yet now United States-based investment agency Moody’s Investor Services has warned that curtailing of civil society and political dissent could impact India’s growth potential in the long run.

The fact that a leading credit agency has hinted that an escalation of political tensions could contribute to a downgrade, shows it is time for the ruling establishment to recognise that social frictions cannot be divorced from economic development.

The agency has specifically mentioned the eruption of unrest in the northeastern state of Manipur. Noting the fact that 150 deaths had occurred during the conflict, it pointed to the resulting no-confidence motion in Parliament which failed to pass. From the perspective of India’s credit rating, Moody’s felt such rising domestic political tensions could lead to more populist policies being followed at both the regional and central level. On the plus side it was confident that the “elevated political polarisation” would not lead to destabilisation of the government.

The remainder of the rating agency’s assessment is all to the good as far as India’s long term outlook is concerned. It comments that high GDP growth will contribute to gradually rising income levels and overall economic resilience. This, it feels, will support gradual fiscal consolidation and government debt stabilisation, albeit at high levels. Moody’s has not upgraded the Indian economy from the lowest investment rating of Baa3 but has affirmed the rating and retained the outlook as ‘stable’.

Its comments on the “rising sectarian tensions”, however, underscore the fact that the intersect of political and economic development will be examined closely by any entity looking at long term prospects for the Indian economy. The fact that a conflict, be it in a remote region, has been simmering for nearly four months is bound to cause concern to potential foreign investors. To add to investors’ fears, the Manipur situation has been followed by communal riots in the Mewat region of Haryana, close to the high-tech city of Gurugram.

These incidents may not have been specifically mentioned in the latest Moody’s report, but are bound to be worrying for multinationals seeking to locate projects here. It must not be forgot that Haryana borders the national capital and also comprises the most affluent segment of the National Capital Region. Known as Millennium City, it has been chosen as the headquarters of a wide swathe of multinational concerns, including Big Tech. Numerous Japanese and Korean firms are based here leading to many luxury condominium complexes being populated with expatriates from these countries.

The fact that leading corporates had to tell employees in Gurugram to work from home for several days to avoid potential clashes, is not a sterling recommendation for the safety and stability of investments. According to the Godrej Properties website, offices of 250 Fortune 500 companies are in Gurugram.

It is in this backdrop that one must view threats to those belonging to the minority community in Gurugram slums. The district administration was quick to assure that protection would be given to any persons warned to live the area by lumpen elements. But according to media reports, it was not quick enough to prevent the departure of many families terrorised by such elements.

The key element in these events highlighted by Moody’s is that the “further weakening of checks and balances” along with political tensions would undermine India’s long term growth potential. The clashes in Manipur and other parts of India, thus, cannot be considered in isolation from the drive to propel economic growth.

The example of China in this regard should be considered as salutary. It was not just the disruption of operations by the zero-Covid policy but also the domestic protests over the Xi Jinping’s policies that triggered what is now known as the China-plus one policy.

Multinationals are now looking for more stable and peaceful shores for their fresh investments. Unless conflicts over religion and ethnicity are brought under control, a similar attitude could well be taken by investors to the Indian economy. There is a view that much of the extreme polarisation in recent times has been motivated by the forthcoming general elections next year. If so, that is a short-sighted policy that could have disastrous consequences for the economy in the medium and long term.

(Sushma Ramachandran is a senior journalist.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.