Sourajit Aiyer - www.MarketMoving.Info, UK - What India's leading PM Candidates mean for its economy, May 2014
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What do India’s Prime Ministerial candidates mean for its economy?
By: Sourajit Aiyer
As India undergoes federal elections with 800 million eligible voters, what do the contenders for the Prime Ministerial role mean for its
Leading the race are Rahul Gandhi, the candidate of the Congress Party-led UPA coalition, and Narendra Modi, the candidate of the
Bharatiya Janata Party-led NDA coalition. Challenging them are Arvind Kejriwal of the new Aam Aadmi Party, as well as bigwigs
from regional parties who can form a possible Third Front alliance.
The new government, whoever forms it, will inherit an economy which is in a severe slowdown – the winner’s curse. The Indian
economy, which recently displaced Japan to become the third largest in the world in Purchasing Power Parity terms, is in a very bad
GDP growth is at a decade low, inflation is stuck high, industrial and manufacturing sectors have frozen, job growth has dried
substantially, infrastructure development has slowed, exports remain sluggish and the fiscal deficit issue in public finances haunts
Election manifestos of the major political parties talk of similar buzzwords like boosting growth, development, jobs etc. Within that,
some emphasize certain areas, some others. If one has to define the broad vision of the three main contenders based on the
emphasis of their manifestos, it may not be hazardous to estimate Gandhi’s as social welfare-led development, Modi’s as commerce-
led development and Kejriwal’s as clean politics-led development.
India probably needs a dose of all three. It needs Gandhi’s social welfare schemes since a large chunk of the population remains at
low-income levels, unable to afford basic goods and social services, more so if the country is unable to create enough economic
activity and income opportunities to enable them to afford these on their own.
To take the economy out of a crisis quickly, economic activity needs to be enhanced, bringing in more companies to invest and
create jobs. This is where Modi’s track-record in improving Gujarat’s economy adds faith for essaying India’s revival.
India also needs a clean political system to ensure effectiveness and efficiency of governance and government services. As Kejriwal
puts it – clean economics cannot exist without clean politics. This would also help improve India’s image globally.
AREAS OF CONCERN
There are seven broad areas of concern that come to mind: economic growth; fiscal deficit and inflation; jobs, skills and
entrepreneurship; industries, investments and infrastructure; corruption; centralized vs. decentralized management; and credibility of
Let us use these areas to dissect the three contenders as per the contents of their manifestos and media coverage, and ascertain
what they might bode for the economy.
GDP growth, which ranged between 7% and 9% during the last decade, has dipped to a dismal 5% in the last two fiscal years.
Growth under 5% does not do justice to a nation of 1.2 billion. The GDP growth figure also does not tell whether the expansion has
been inclusive. Large swathes of population have been left out in India’s two-decade old growth story, which many believe to have
been skewed towards certain sections.
Poverty rankles deep, economic distress is a major reason for migration to unplanned urban clusters and perceived socio-economic
imbalances are a reason for incidents of crime.
Gandhi promises a return to 8% GDP growth within three years, while Modi or Kejriwal have not made a quantitative commitment.
Expectation from Gandhi about reviving growth is biased by the dismal track-record of UPA since 2009-2010.
While this period coincided with the global slowdown, policy slowdown and corruption were also major factors. The main reason for
India’s inflation is pegged to be supply-side inadequacies rather than demand.
This inflation is now feared to be structural given that policy paralysis slowed investments into productive assets/infrastructure, which
could have addressed those supply-side inadequacies. However, a fresh leadership under Gandhi might overcome these handicaps.
Kejriwal asserts a business-friendly image, stressing his priority to increase participation of the private sector to bolster economic
growth. However, the private sector has gone into a cocoon as far as committing fresh investments are concerned, and the
government has to initiate commitment by making public expenditure first.
But India’s fiscal situation is weak due to subsidies and social-welfare schemes, and the ability to maneuver for public expenditure
plans is limited. In fact, this is a challenge Modi faces too. There are expectations from him of taking India back on the growth path
based on his track-record in Gujarat.
Reviving growth is where Modi’s candidature shines. He might start by clearing the stalled projects quickly to initiate some action;
however, these projects will take time to fructify. Moreover, the reason for stalling of some of the projects is related to the provincial
governments, which might take time.
Weather uncertainties regarding El Nino may impact crop output, keeping inflation and interest rates under pressure – non-conducive
for growth revival. The Rupee stabilized in the second half of FY2013-2014 on the back of record inflows from foreign portfolio
But this money is fickle in nature and can move out if the realization of actual growth gets delayed beyond a few quarters. That might
depreciate the Rupee, unless Modi can counter that in record-speed by bringing in foreign direct investments into projects to revive
Managing the fiscal deficit and inflation are critical challenges. The current Finance Minister says the fiscal deficit is now under
control, though the attributable reasons include cutting public expenditure, rolling over of subsidies to the next year and forced
dividends from public sector companies.
However, social-welfare plans of all three candidates can put public finances and fiscal deficit under pressure in coming years. While
the mega social-welfare plans like rural employment guarantee, food security etc are synonymous with Gandhi’s UPA, even Modi and
Kejriwal have populist social plans in their manifestos.
All these three candidates promise access to electricity, sanitation, drinking water, education and affordable healthcare, as well
assistance for low-cost ‘pucca’ housing for all citizens. Modi and Gandhi talk of education and entrepreneurship assistance for
backward/minority communities and financial support to unorganized sector/destitute.
Interestingly, Modi also includes Madrasa modernization. One expects Gandhi to continue the UPA legacies like the rural
employment scheme (which is around 1% of GDP), expand the food security schemes, apart from his plans to make healthcare
expenses 3% of GDP and investments into science and technology 2% of GDP.
While critics argue such social plans are non-asset creating and a fiscal strain, the rural community and the low-income urban
community has been left out of India’s skewed economic growth and there was a need to enhance their affordability for social
Reviving rural demand is where Gandhi’s candidature shines. The increase in the rural community’s purchasing power due to
UPA’s schemes can also be credited as a reason of why rural-India is an attractive target market today for Corporate India across
While Modi and Kejriwal stress the need to revive the actual rural economy, there is no clarity on how they propose to do so –
through increasing economic opportunities or by doling out social benefit packages.
Modi has raised the topic of skill-creation time and again, and this might enhance opportunities for economic activity. Promises by
Modi and Kejriwal also include paying 50% over the input cost for crops to farmers – a rather populist move, while Kejriwal proposes
to stop contractual employment so that they get employment-related social benefits.
So, Gandhi alone may not be guilty of fiscal indiscipline, as many imagine it to be. But how do they propose to counter fiscal strain
with sources of revenue?
Gandhi proposes soonest implementation of the Goods and Service Tax Bill and Direct Tax Code to improve tax revenues, Kejriwal
to increase tax compliance and a progressive tax structure and Modi a rationalized tax regime.
But Modi has plans for countering inflation, which impacts affordability for basic goods/social services, thus reducing the need for
social schemes in the first place.
Modi’s approach on inflation consists of measures to stop hoarding and black marketing, unbundle Food Corporation’s activities,
evolve a single agriculture market and use technology for faster dissemination of actual prices.
Incidentally, nobody has raised the issue of disinvestment, except occasional mentions by Modi and Kejriwal that the government has
no business to be in business.
Job creation and entrepreneurship are areas all of them have addressed. Gandhi promises creating 100 million new jobs, improving
university and secondary education infrastructure, scholarships/jobs for backward communities, bringing in marginalized sections of
youth and skill vouchers for unemployed graduates.
Gandhi does mention an entrepreneurship fund, but that is only for certain communities. Both Modi and Kejriwal emphasize the need
for skill-enhancement and entrepreneurship at a more holistic level.
Modi talks of improving entrepreneurship and artisan skills for small-scale industry development and setting up a nationwide
incubation programme for innovation and entrepreneurship.
He aims to develop the labour intensive sectors, modernize the retail and agriculture employment base and transform the
employment exchanges into career centers.
Kejriwal promises a conducive entrepreneurship ecosystem by ensuring access to capital, information, infrastructure and increasing
opportunities for learning and talks of countering economic distress-led migration by enhancing small-scale enterprises and traditional
A push towards entrepreneurship and skill creation can help enhance the economic output and public finances. In fact, these are
critical for a country of India’s size. Not many Prime Ministers in the world face the task of mobilizing employment opportunities for
few hundred million citizens.
The need for the UPA to balance coalition politics took its toll on the speed of reforms. This, along with environment clearance issues,
policy delays and inflation slowed down the investment cycle by companies.
Tight monetary policy kept the cost of borrowing high. Infrastructure slowed due to regulatory delays, challenges of public-private
partnership model and long-term funding. New projects froze and a number of existing projects are stalled.
Sanctioning of approvals slowed, as ministers and bureaucrats preferred not to make any decision rather than risk getting embroiled
in any scam.
In this environment, Gandhi aims to build upon the success of the Cabinet Committee on Investments, which has made some
headway in moving stalled infrastructure projects in recent months.
He aims to speed up the completion of the industrial corridors and freight corridors, set up a national manufacturing policy to make it
22% of GDP by 2022 and enable a single-window clearance for manufacturing projects.
Modi aims to create an enabling environment for business via single-window clearance systems for faster approvals, time-bound
environment clearances, investments into logistics/infrastructure, etc.
These are major expectations that companies have from Modi, given his track-record in Gujarat’s industrial and infrastructure
development. But two challenges that Modi might face here are activism by opposition (something which members of the NDA
alliance have also done in recent years) and managing coalition brinksmanship.
Gandhi and Modi also talk of high-speed rail connectivity, developing urban clusters/cities, road connectivity and also of supporting
greenfield industrial townships and global hubs of manufacturing respectively.
Kejriwal’s focus is on an ‘honest enterprise’, free from corruption and crony capitalism. He talks of streamlining regulatory processes,
fostering healthy competition in the market economy, curb monopolistic tendencies and ensuring active participation from the private
All three also talk of infrastructure development in urban and rural areas, irrigation areas, renewable energy etc. Modi adds
improvements to agri-rail network, while Kejriwal adds agro-processing.
Kejriwal’s stress on monopolistic tendencies might have some relevance. There has been talk of ‘big-businesses’ being friendly to
Modi due to the incentives extended to get them to invest in Gujarat in very large-scale projects.
Some of these incentives are cost-advantageous for the large companies. Hence, such incentives might end up making the big guys
bigger, while marginalising the small players.
It might also be pertinent to add that they are all open to foreign direct investments, except on the contentious issue of FDI in multi-
brand retail of which Gandhi is the only flag-bearer.
Nevertheless, Modi has broached relevant terminologies like value-chain and value-addition, which leads to the belief that his
economics-first approach would lead India to deepen two-way linkages with countries (including India’s neighbours), even if it means
importing something at a competitive cost which is also produced locally (at a higher cost), so that India can end up producing
something in the eventual value-chain of that product.
This expands scope for business and is in mutual benefit of both countries. If local businesses can innovate and produce at
comparable costs, that is their credit. There seems to be an element of economics-first in Modi, whereas the UPA has not shown
concrete results in deepening foreign trade/investment despite its engagements, especially with neighbours. So far, Kejriwal seems
inexperienced in this.
Corruption is a plague keeping the economy from realizing its efforts in entirety. Combating corruption is where Kejriwal’s
candidature shines. His plans for an effective Jan Lokpal Bill (citizen’s ombudsman), targeting the black economy and transparency
in governance processes might be useful in increasing the government’s productivity and maximizing the benefits flowing to the
citizens post-systematic leakages.
But the issue here is the time required to clean the system as Kejriwal envisions it, and whether people have the patience to wait that
long – especially now in a crisis when majority of them are reeling under years of income stagnation and price rise.
Modi also talks of Lokpal and transparency, while Gandhi also mentions corruption and black money. All of them have plans for
speeding up the judicial process and ensuring women’s safety, which are essential.
IMPROVING PUBLIC SERVICES
They are also keen to leverage technology for governance, which means faster, accurate delivery of public services. These include
processing of passports, licenses as well as ambitious network connectivity plans.
Gandhi envisions digitization of rural land records and a disaster management communication system. Modi and Kejriwal plan to use
technology for healthcare delivery and skill imparting, respectively. All these areas of governance are critical for India, and technology
can help create some transparency, though its effective implementation remains a concern.
Not many Prime Ministers in the world face the gigantic task of managing a country of 1.2 billion people, where ethnicities, cultures,
mindsets and mannerisms change every few kilometers.
Would a decentralized management style or an autocratic style be better to govern India? Kejriwal has advocated empowerment of
decision-making and functioning to the grassroots-level blocks (Gram Sabha). This would bring the people directly into the
It might mean development effort is better directed, leakages are minimized and benefits address the region’s need.
In Kejriwal’s model, local communities would have a role in managing the region’s natural resources, get revenue-sharing and a say
in the displacement of people. But the challenge is operational success, as implementation can get delayed due to in-fighting among
members of the local community.
In contrast, some believe Modi to have an autocratic style of management. Whether this is baseless or merits discussion is separate,
the question is would an autocratic style be more apt to stabilize a ship which is currently in a crisis.
Currently, it is imperative for the economy to get on track and excessive decentralization might just delay that process. But autocracy
also has another side. Opinions of critics might not get an ear and dissent might not be tolerated. For example: media reports allege
land was given to big industrial houses at subsidized rates in Gujarat. If this is indeed true, it indicates the land owner either received
minimal compensation for his asset, or the State put itself in fiscal pressure if it compensated the owner separately.
But the other side of the coin is that it is equally important to get big businesses to invest into long-term commitments as it creates
jobs and demand for ancillary products/raw materials – critical for economic growth.
As far is Gandhi is concerned, the UPA regime had set up a National Advisory Council to achieve its agenda. However, this council is
believed to have largely failed as it spent on non-asset creating social projects without enhancing economic opportunities, despite
creation of empowerment across the social strata being an essential need for India.
Credibility of ultimate delivery is where Modi’s track-record outranks that of Gandhi and Kejriwal, especially when the Indian economy
is undergoing its worst crisis in recent years. Modi’s work in converting Gujarat into one of India’s most developed states (across
industry, agriculture and services) has built this credibility.
In contrast, the depth of Gandhi’s involvement in the UPA between 2004-2014 has been unclear, and the opinion of some is that he
might still be inexperienced for the top-role.
There is a similar issue of experience-deficit that people opine about Kejriwal, especially after his rather abrupt end to his position as
Delhi state’s Chief Minister, within 49 days of rule in January-February 2014.
What Gandhi and Kejriwal are missing is a track-record of demonstrated achievements, which Modi has tactfully built over the last
decade and is now leveraging to build his credibility for the role of Prime Minister. When the economy is in crisis, there seems to be a
human tendency to repose faith in experience. However, there are interesting observations regarding his Gujarat track-record as well.
Growth rates in state-wise net domestic product shows Maharashtra, Delhi, Tamil Nadu and Haryana did just as well during the last
decade – even bettering Gujarat in some cases. Rajasthan and Bihar bettered Gujarat in Industrial sector in last four years.
Rajasthan, Bihar and Madhya Pradesh beat it in Agriculture, while Bihar, Haryana, Maharshtra and Madhya Pradesh beat it in
In conclusion, the challenges for any of the three candidates are immense. India might very well need a dose of each of the three, but
it will only get one of them as a leader. The winner’s responsibility will be huge.
The author works with a leading capital markets company in India. Views expressed are entirely personal and do not represent those
of any entity.
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This entry was posted in In Depth, Views and tagged Arvind Kejriwal, development, economy, India elections, infrastructure,
investment, Narendra Modi, Rahul Gandhi, recovery on May 7, 2014 by Antonia Oprita.