Gordon G. Chang
Forbes
May 18, 2014
On Friday, India’s Election Commission announced that the Bharatiya Janata Party had swept the five-week election for the Lok Sabha, the lower house of Parliament. The BJP exceeded already high expectations by winning an absolute majority, capturing 282 of 543 seats. With coalition partners, the party will control 337 seats.
The Indian National Congress, which has dominated the world’s most populous democracy since independence in 1947, suffered its worst electoral defeat ever. Congress took just 44 seats. Prime Minister Manmohan Singh resigned on Saturday.
In the Indian political context, the biggest loser was Rahul Gandhi, who would have replaced Singh had Congress been successful at the polls. His heart obviously wasn’t in continuing his family’s hold on power, however. Gandhi’s campaigning was lackluster and a confirmation of the notion that four generations in any one line of endeavor is at least one too many. His future at the helm of the storied party is in doubt.
Gandhi is not the biggest loser overall, however. That honor belongs to Beijing, because it’s certain that in the coming years direct foreign investment will head to India instead of China. For a Chinese economy needing outside cash, the redirection will not come at a worse time.
In India, times could not be better for the BJP. Its win was the most decisive since 1984, when Congress’s Rajiv Gandhi won after the assassination of Prime Minister Indira Gandhi, his mother and Rahul’s grandmother.
As a result of the landslide, the BJP’s charismatic Narendra Modi formally takes over Wednesday as India’s 14th prime minister.
Modi ran on a platform of fundamental economic reform, promising to do for all of India what he accomplished as chief minister of the western state of Gujarat, where with liberal policies he engineered a boom. “He provided Gujarat with India’s first real free-market economy that led to new infrastructure and job creation,” says Subrata Mukherjee, a retired political science professor at Delhi University.
As the Wall Street Journal’s Geeta Anand and Gordon Fairclough report, voters like Congress Party subsidies and giveaways but voted for Modi because they wanted India to become one big Gujarat. The breath of the BJP victory, therefore, signals a change in the mentality of a country, a clear rejection of the socialism of its founders.
Singh, who just stepped down, gets credit as a leading reformer when he was finance minister in the 1990s and kudos for the boom of his first term as prime minister. His second term as leader, however, was a disappointment. His creaky ruling coalition prevented necessary change, and growth rates tumbled, creating nationwide dissatisfaction.
At the same time, foreign investors found themselves hemmed in. Perhaps the most notable example of failed reform in Singh’s last years involved big-box retailing, and Walmart’s highly publicized struggles were a deterrent for multinationals. Many other foreign companies also felt New Delhi’s sting.
Yet past disappointment has not soured the outlook about the future. Foreign investors did not wait for the electoral results before pouring cash into the country. The Sensex index has jumped 29.5% since last August, partly because of the expectation of a Modi win. Foreigners bought more than $16 billion in equities and bonds in the past half year and now own more than 22% of the stock listed in Mumbai. Also, the rupee has gained on the dollar recently.
Who wouldn’t love the Indian story now? Modi’s bigger-than-expected win means he will have the majority, at least in the lower house of Parliament, to accomplish what his predecessor could only dream of. The incoming leader has the power to remake the Indian economy, and the betting is that he will do so. Already, he is being called “SuperModi” and the Margaret Thatcher of India. Indians speak of the “Modi wave.”
Modi himself is feeding the extraordinary hype. He is not only talking about “shining India,” a nod to a past BJP slogan, but has also proclaimed our era to be “India’s century.”
This century is already supposed to belong to China, but that pronouncement is not heard as often now. China’s economy, the motor of its rise, is sputtering and on the edge of an historic failure. At the same time, Beijing is intensifying its discriminatory investigations of multinationals. Last week, for instance, authorities accused Mark Reilly, the former head of GlaxoSmithKline’s China unit, of bribery while largely letting domestic corporate malefactors operate unimpeded.
In a deteriorating economy, Beijing’s blame-the-outlanders policy may be good politics, but it is very bad economics, especially in the long run. China, unfortunately, is unlearning the wisdom of the Chinese leader who launched reforms at the end of the 1970s, Deng Xiaoping.
Manmohan Singh, once called India’s Deng, has now left office in failure. Among his shortcomings, he was not able to open up his economy. At the moment, the environment for foreign companies in China is still way better than that in the subcontinent. Yet it is trend lines that are important for investment flows. In China, things are getting worse for foreigners, and in India they are going to get a whole lot better. A central tenet of Modinomics, as it is now called, is that large businesses create jobs, prosperity, and a better society.
Just ask Walmart. Modi ran on a platform affirming existing rules that keep foreign companies out of India’s retail market, a sector in desperate need of modernization, but the plank is largely thought to be a bow to political expediency. In any event, it did not deter the world’s largest retailer from upping its involvement in India. In anticipation of a Modi win, the Bentonville, Arkansas-based behemoth last month announced plans to open 50 new wholesale stores there as well as grow its e-commerce operations. You can be sure that Walmart did not do this with the expectation that it would forever be kept from participating directly in India’s $500 billion consumer market.
Analysts point out that Modi is an “old friend” of China, but he may be the worst thing to happen to that country in a long time. At a moment when the Chinese economy is teetering, he is indirectly giving it a shove in the wrong direction. The “giant sucking sound” you will soon hear is money, once headed for China’s shores, on its way to India’s instead.
