Election victory should lead to UP-ping the ante on reform

India's Prime Minister Narendra Modi (for illustrative purposes only)
Image: Adnan Abidi / Reuters

The historic victory registered by the Bharatiya Janata Party (BJP) in the Uttar Pradesh and Uttarakhand elections and its encouraging performance in Manipur will likely give a boost to the Narendra Modi government’s resolve to take the next phase of reform forward.

The crucial takeaway from the UP polls is that Modi’s gamble of demonetisation – which had severe critics from several quarters – has paid off in a major way, with the UP results giving BJP a thumping majority of 325 seats in a 403-member house and a 41.4 percent vote share. This, together with the fact that BJP has got acceptance even in states like Manipur, is likely to embolden the government to take on further reform now that it is even more firmly entrenched in the driver’s seat. There’s also the fact that, over time, the numbers in the Rajya Sabha are expected to turn into the government’s favour, clearing further roadblocks for it. Finance minister Arun Jaitley has been quoted as calling this gradual positive shift in numbers a “creeping acquisition”, playing on an M&A phrase.

With the Goods and Services Tax (GST) coming up and expected to be rolled out from July 1, the election results are bound to add to the confidence levels of the government as it pushes through this key reform which is expected to add to the growth rate of the economy over time.

An important element which comes through from this set of elections is the clear shift of Narendra Modi to a pro-poor leader who is willing to take bold bets to take his agenda forward

An important element which comes through from this set of elections is the clear shift of Narendra Modi to a pro-poor leader who is willing to take bold bets to take his agenda forward. The fact that this image has struck a chord with the electorate is evident from the massive majority which BJP has secured in Uttar Pradesh. The interesting thing is, a pro-poor government may also make industry and the business world curious about whether this will come at the cost of further reform. In other words, will a pro-poor Modi be bad news for industry and business?

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FM Jaitley, however, has made it clear the two – being pro-poor and pro-reform – aren’t mutually exclusive. In a discussion on CNN-News18 on the evening of March 11, Jaitley pointed out that, in fact, being pro-reform strengthens the government’s hands in being pro-poor since it allows it to have resources to pump into poverty alleviation programmes. Jaitley said the mandate had further strengthened the government’s reform agenda, and also pointed out that globally, investors were in admiration of India since this was a rare economy which was pushing through reform despite the current global challenges.

The government, the FM pointed out, had already rolled out major programmes on sanitation, access to banking and schemes like MUDRA (Micro Units Development and Refinance Agency) which had found strong resonance.

These arguments seem to have found broad agreement with the business community which is pleased with the election outcome and sees it as a strong endorsement of the Modi brand of governance and also a signal of the electorate’s preference for stability and continuity.

Manish Sabharwal, chairman and co-founder of staffing firm TeamLease Services, says that the election results confirm “that our horizontal aspirations can trump our vertical identities.” Says Sabharwal: “It [the result] has important implications because till now the narrative in politics was that good economics is bad politics.”

He says the results could create some more boldness for the government in pushing through the next set of reforms because voters have signalled that they recognise a ten-year plan is not 10 one-year plans and some short-term pain is all right if long- term gain is perceived. Merits mention here that, even while making the shock announcement on demonetisation on November 8, Modi had made it clear that there would be short-term pain for the people and he was confident that the country would withstand it in the longer term interest of what the move aimed to achieve: Dealing a body blow to the black economy.

Sudhir Dash, managing director at Investec India, says he is hopeful this victory will give the government further control on its reform agenda. “The victories in UP and Uttarakhand essentially mean a better representation by NDA in the Upper House and greater control over parliamentary affairs post July this year.”

Dash adds that on the political front, it will help them in the Presidential election and in initiating discussions on pending political reforms like the Uniform Civil Code and uniform elections, apart from the issue of state funding of elections.

“On the economic front, the implementation of GST will be the biggest beneficiary. Also, the government can now initiate labout reforms and the Land Acquisition Bill which has been pending for the last two years,” he adds.

The business community will be hoping that the results will also strengthen the government’s hand in moving aggressively forward on areas like public sector bank consolidation and sale or privatisation of state-owned units which they have already identified. The idea of a bank for stressed assets to clean up the banks’ balance sheets could also be taken forward if the government so chooses. In short, the next wave of reforms – both political and economic – is bound to get easier.

Besides, some in corporate circles also feel the “irritants” to smoother flow of foreign direct investments (FDI) could also be better tackled and infrastructure could see fresh capital flows, in turn initiating the capex cycle.

Industrialist and Marico chairman Harsh Mariwala sees Modi’s “magical hand” at work in these elections, given the resounding majority BJP has got – brushing aside caste and other considerations. “This performance has beaten all expectations and put Narendra Modi on a very good wicket,” Mariwala says. “The other good thing is the voters have started choosing clear mandates again, not coalitions. Even if you see the Punjab results, the preference is for a decisive mandate. Coalitions mean compromises.”

Mariwala, however, adds that it will remain to be seen how much the government moves ahead on issues like privatisation, which need bold, tough steps. “Frankly I don’t know what they will do on that front. The government should not be running loss-making airlines and hotels,” he says, adding that an agricultural tax on rich farmers and on betting would also be bold steps which should be taken.

But for now, India Inc is likely to bask in the feeling that the Modi government, which despite its pro-poor tilt continues to also be pro-reform, continues on the same path. Industrialist Anand Mahindra’s tweet on the evening of March 11 sums up this feeling. “Investors value predictability and stability. BJP’s resounding victory in UP points to long-term leadership. Markets may well applaud next week,” Mahindra tweeted.

The key words for Corporate India: Long-term leadership.