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AP Photo/Aftab Alam Siddiqui
Kumar has an economic mandate too.
HARD TIMES

The Bihar elections will test just how much India can reform itself

Nitish Kumar, the leader of Grand Alliance that won 178 of the 243 seats of Bihar state assembly, has been the chief minister of the state since 2005. Kumar had also been a part of the Bharatiya Janata Party (BJP)-led alliance National Democratic Alliance (NDA). But he quit the NDA in June 2013 to ultimately become its nemesis.

The man he so soundly defeated, Narendra Modi, was catapulted into prime ministership, with much recognition of his four terms as the chief minister of Gujarat. Kumar, though, never found such accolades from markets and the media. Yet, for the five-year period between 2005 and 2009, the 11.03% growth rate in the state gross domestic product (GDP) of Bihar was the second best in India—just after Gujarat’s at 11.05%.

In June 2009, Bihar’s capital city of Patna was adjudged by the World Bank as the second best city to do business in India after Delhi. But it largely went unnoticed by the media, but it seems the citizens of Bihar remembered all these positive changes, which is why they gave Kumar such a massive mandate.

So, while most of the observers and leaders of the winning alliance claim it to be a victory over social intolerance, this mandate could also be one for the continuation of  growth that Bihar exhibited since Kumar took over.

A litmus test for reforms

When the winter session of the parliament starts, over a dozen critical bills would be put up for consideration in the parliament. Among these critical bills, the most apolitical ones include the Real Estate Regulatory Authority Bill and the Bankruptcy Code. The Goods and Service Tax (GST) Bill, Land Acquisition Act, Coal and Mines Bill and amendments to labour laws may also be reintroduced but these appear less likely to be passed. If the reform agenda is to remain a credible part of the India growth story, at least the apolitical bills should ideally be discussed and hopefully passed by the parliament.

However, if the opposition parties feel that their protests against the Modi government are bearing fruits—or if Modi’s growth agenda is itself weakened by dissidents within the BJP—then winter session risks collapse. Then, one may have to rethink whether India can at all reform itself in a calibrated way by generating political consensus.

The ‘P’ word and sentiment

The successful passage of the apolitical bills in the winter session will keep the “India story” intact, at least in the short to medium term. Then, the focus may shift to the annual budget in February 2016. If a plausible budget is delivered, investors will continue to hang onto the Indian growth story.

But if the winter session fails to pass any of the major bills, the expectations from the budget will be so high that it will almost certainly fail to meet them. That could then lead us to the spectre of “policy paralysis,” which haunted the last years of the previous government, and sapped the economy of its vitality.

A policy logjam will also have an impact on Indian equities, which have been stable since the Modi government came to power. 

The current rupee strength owes a lot to the US dollar investment in the Indian equity market. A sell-off, thus, would actually weaken the Indian rupee. In turn, this will prevent the Reserve Bank of India from bringing down the interest rate and the situation of 2013 may repeat itself. This potential policy and monetary paralysis may reduce India’s economic growth which has been higher than the sagging emerging markets, thus far. 

Eventually, it all depends on the winter session, and the maturity of India’s political class.

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