Decoding why India Inc should not cheer state election results just yet

The markets have quite naturally been spooked upwards on account of the victory of the BJP in the Elections, which appeared to be more of a referendum for Modi. Is it rational? Probably yes for the time being as the way the market looks at it is that if BJP led by Modi comes to power, which is a linear extrapolation of the results at the state level, then the successful Gujarat model will be replicated at the national level. How long will this last? Probably for another 2 days or so when the next set of economic indicators is out and the ground reality sinks in.

In a way it is difficult to interpret these results both as it stands today and what it means for May 2014. The BJP victory comes as a result of a package: an anti-Congress platform with an alternative in the form of Modi as PM. Modi is taken to be a personification of progress, reform and development. But, curiously the four states that went to the polls are all examples of good governance by the existing regimes and therefore, it becomes difficult to say that it was bad governance at the state level which resulted in the outcome. It appears that the shadow of the Government at the centre definitely brought about the gloom.

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If one looks at the freebies aspect, which is a corollary that goes with all Elections, we get a result where there is only ambiguity. The Congress distributed free food grains in Rajasthan around 6 months before the Elections. It did not work. In Chattisgarh, it has been government policy for 5 years to dole out the same, and has been appreciated. Rajasthan has actually been more progressive in terms of development parameters, yet the anti-incumbency factor worked, while it did not in case of Chattisgarh or Madhya Pradesh. It appeared to be a negative vote for the Congress, which again means that the shadow of the ‘character’ of lack of it at the national level had dominated.

The icing was the inflation factor, where high prices, especially of onions,(which curiously have settled down just after the Elections) had its impact. While high inflation does go along with all pre-elections months, it had grown to become unbearable, and the fact that nothing direct was done to bring down prices bore down heavily on the psyche. The clue here is that this number has to come down if the Congress is to make a fresh start forthe General Elections.

There are naturally questions for all the parties concerned. First, assuming that the BJP comes to power; will it be possible to scale up the Gujarat model? Running an administration well within a limited geography is easier to doing the same at the national level. There are Federal issues and different governments in power to either support or come in the way of development. This will be a challenge as localized issues come in the way, just like the land issue of West Bengal or the mining issue in Orissa. Therefore, it may not be all that easy for India Inc to really feel reassured that things will be easy.

Second, there is also the issue of a coalition government. While the present move looks like that the BJP will be the dominant party in May, states like West Bengal, Orissa, Bihar, UP, Tamil Nadu, Kerala and Maharashtra have strong presence of regional or specialized parties who wield sufficient disruptive power that can force the leading party to the negotiation table. These regional parties, which tend to be opportunistic, are weak to survive on their own, but strong to provide the critical support to keep a non-majority party in power, while extracting their pound of flesh. The UPA experience in both the eras had to contend with this problem - the proverbial Achilles heel of coalition politics.

[caption id=“attachment_1247813” align=“alignleft” width=“380”]  Representational image of voters. AFP[/caption]

Third, the AAP party, which has been quite an enigma this time, would also have to do some soul searching. Getting people to vote on the basis of Governance is commendable as this is a lesson to all parties that bad governance can no longer be taken for granted. The electorate is now savvier about Politics and will not be swayed by just freebies and promises. The entry of a large proportion of young population as well as impressive voter turnout justifies this belief.

But there are two issues here. The first is that it has to grow into a national stature and for this the options are limited if it has to go on its own. Whil Kejriwal has averred often that there is little to choose between Congress and BJP, it gets even more challenging as one moves to the smaller regional parties. How does it gear up to get in people who believe in this cause even in all major cities to begin with? Presently, it has started tactically well from Delhi where the population is politically conscious being the seat of power. Can this be done in Mumbai or Bangalore or Hyderabad to begin with?

Second, the challenge is to do something constructive while being in the opposition. This has to be proved in the next 5 months or so or else it will be a good opposition party which does not quite have the experience orwherewithal to govern. Such movements with charismatic leaders are difficult to start, which it has accomplished. But such movements are even more difficult to sustain, which is a challenge going forward.

Fourth, what happens to the Congress? There is need for introspection and firm action to correct the gaps. So far, the focus was on trying to show that the economy was doing well and that reforms were on track. This has not quite worked, because while growth, fiscal deficit, WTO, reforms, etc. appeal to the rating agencies and foreign investors, voters equate good Economics with inflation and jobs. Freebies work well to begin with, but once replicated by others, cease to matter, and though their provision does not add to the votes, any reduction can be catastrophic. Even in the pastthe Rs 2 /kg of rice made popular in the south by the TDP worked until it lost its novelty value, when other governments followed suit thus making the beneficiaries believe it as an entitlement rather than a sop. The directionfor the party is evidently towards major clean-up operations, as it appears this factor has translated a national concern into a state issue.

A miss-out everywhere has been the Mizoram Elections by the media as well as parties. None of the bigwigs had campaigned here which though not surprising is distressing. The north eastern states have always been treated in adeprecating way with little effort made to integrate them with the rest of the country. There are 25 seats of the Lok Sabha, but never really been considered to be important in the larger scheme of things. Personal interactions through campaigning by the senior leaders would have helped to reassure these states that they are still important for India. In fact, curiously, they become important only when there are signs of incursions from across the border. Something to think about.

The author is Chief Economist, CARE Ratings. Views are personal.