For those not familiar with Indian politics, the events of the last month may have largely passed unnoticed. The largest democratic vote in the world has taken place in stifling 100+ degrees heat to return the Congress party of Manmohan Singh for a second term with an overwhelming mandate for change. According to the Financial Times 420 million people voted for Mr Singh, the 76 year old widely respected economist and technocrat, to be the first politician to be returned to power after a full term since Jawaharlal Nehru according to the Indian Business Standard. Unlike Nehru’s failed socialist policies of the 1950’s and 60’s however, Singh has stood for reform and modernization. The benefits of previous reforms are apparent for anyone visiting India today but the last five years have been dogged by inter-party compromises as Singh has held together a coalition of 13 parties and as a consequence recent reform has moved at a snail’s pace.
The Indian stock market is betting that is now going to change. Shares surged 17% in one day in the expectation of things to come. With such a resounding (if unexpected) mandate, the market is expecting the government to move forward with privatization, educational reforms and greater private participation in infrastructure development. As we reported recently the outcome of this election could be crucial for India’s place in the world 5 to 10 years from now. The country is better placed than many emerging markets to play a role in leading the world out of the current recession. Indian banks were prevented from indulging in Wall Street’s wizardry and so are generally in good shape. Indian industry, even those few major corporations like Tata which have been exposed to the global market, are generally doing well in a domestic market still enjoying solid growth.
But clear mandate or not Mr Singh has massive challenges ahead of him. India’s infrastructure is a major hindrance to the country’s ability to compete on the global stage. Even though manufacturing only represents 16% of GDP according to Logistics Management May 1 edition, it does have aspirations to move upmarket from the poor quality image it is sometimes unfairly labeled with. Even world class manufacturers like Bharat Forge and Larsen & Tubro are consistently hamstrung by intermittent power supplies, poor quality and congested roads and port delays. With a highly educated, skilled and entrepreneurial low cost labor pool, India should be directly competing with China, Vietnam, Thailand and other SE Asian countries but is held back by the failure of successive coalition governments to unshackle the economy and provide the infrastructure for industry to compete.
We have seen what China can achieve when the shackles are taken off. Are we going to see the same in India over the next 5 years? Let’s hope so, the fortunes of some 250 million people still living below the poverty line are at stake.