Will political uncertainty drive populist promises in India?

Recently-concluded state elections – and the losses suffered by the Congress Party in four of the five states that went to the polls – have shaken the status quo in India ahead of the general elections next year. It is because of these changed circumstances that businesses need to keep a close eye on the events unfolding across the states in the months to come.

As India heads into the 2014 general elections, the surprising success of the AAP in the state of Delhi’s legislative assembly elections and the party’s election promise of cheaper power could drive other small parties to call for populist schemes.

The elections across five states in the last two months have seen the ruling Congress Party face defeat in four of them. The initial mood of the nation seems euphoric as the Congress was viewed as the party that had thrust some unpopular policies on the people.

In response to election results, India’s Sensex and Nifty, the two benchmark indices for the stock markets, have recently touched an all-time high.

Stock markets are factoring in a mood swing in the country that seems likely to catapult the Bharatiya Janata Party’s (BJP) candidate Narendra Modi to the prime ministerial seat in New Delhi when general elections are held in May 2014.

Populist manifestos and promises to keep

The stunning victory of the AAP in Delhi in its first electoral outing has clearly been the highlight of the recent elections. The Indian National Congress – which has been at the helm of government for three consecutive terms in Delhi – was decimated, with just 8 members elected to the house, compared to the 42 it had in the previous term.

Slashing power tariffs was one of the biggest planks for both the BJP and the AAP. The BJP promised to cut tariffs by 30 percent while AAP promised in its manifesto to cut power tariffs by 50 percent, as well as order an audit of power distribution companies and rectification of those electricity bills that have been ‘inflated’. AAP has also promised that electricity bills will be ‘reviewed by an independent agency’.

There has been no word from the power companies in Delhi – Tata Power-backed NDPL and Reliance ADAG-backed BSES. But it seems the wishes of the people may not be so easy to brush away. Nearly 60 newly elected members of the 70-member house have promised lower power tariffs to Delhi’s electorate, which came out in droves to vote, with voter turnout touching an unprecedented high.

However, the economics of India’s power sector may queer the pitch for a government that wants cheaper power. Nearly two-third of India’s power is generated using coal, some of which is imported. If the restrictions on coal exports from Australia and Indonesia take a turn for the worse, India’s peak power shortage – in excess of 12 percent – could follow, hitting industrial production and, in turn, India’s GDP growth.

It is clear, though, that the power tariff in Delhi, which, arguably, may not even be the highest in the country, has become a key issue with the public. “If the hype surrounding power tariffs could catapult the AAP against its established national rivals in Delhi, it could potentially be replicated in other states across the country,” a senior Delhi government official said.

Although many other factors contributed to the AAP’s success – most notably, its campaign against corruption – the words of the official quoted above may just prove to be prophetic. High prices across the nation may offer the opportunity for an attractive electoral platform. Consumer inflation in November rose to 11.24 percent against 10.17 percent in October. Food inflation spurted to 14.72 percent and one of its components, vegetable prices, increased by over 61 percent in the last year.

The recent monthly industrial production figures showed 1.8 percent growth, slipping again after four months. With a slowing economy and galloping inflation leaving a hole in everyone’s pocket, it will hardly be surprising to see political parties call for economic policies that are tailored to appeal to the Indian masses.

It is likely that other regional political parties will begin to root for more populist economic policies, similar to what has been seen in Delhi and mirrored in the success of both the BJP and the AAP.

Price rise has been one of the issues that AAP has been able to successfully raise. Since inflation is increasing, a convincing voice – and argument – that empathizes with the common man, then, is expected to go down well with voters across the country.

Interestingly, retail companies looking to spread their wings in Delhi could also face a roadblock if AAP has its way. AAP is against foreign direct investment in India’s retail sector – another stance that it believes will endear it to the millions of traders it hopes to identify with. Since the new FDI policy on multi-brand retail has put the onus of permitting global retail companies to set up shop firmly on the states, Delhi could join some others like Uttar Pradesh and West Bengal that are have long been holding out against the entry of global retail giants.

Political gridlock

At the moment, though, the politics of government formation in Delhi have clearly overshadowed the economic policies that are to come. Delhi is deadlocked since the BJP, which missed the crucial halfway mark by three, has refused to form the government with only 32 of the 70 seats. AAP with 28 seats has been offered support by the Congress’s 8 members, which could take them past the halfway mark. However, Arvind Kejriwal, Convenor of the AAP, has set 18 conditions it wants the Congress to meet before the AAP will even consider accepting its support.

The Congress’s response to the AAP’s laundry list of 18 conditions seems to have been too ‘lukewarm’ or ‘vague’ to convince the AAP, which took an almost confrontational stance against the Congress in the run up to the elections. The Lieutenant Governor of Delhi has been left with no choice, then, but to recommend President’s rule in Delhi.

The way things stand Delhi will have to hold fresh elections, which may be concurrent with national elections for the Parliament in April-May 2014. If Delhi is forced to hold a second round of elections, many decisions will be put on hold until a new, fully-functioning government is in place in the state. This condition may have a major impact on business plans.

General elections in the country for the 545-member Lok Sabha (Lower House of Parliament) begin in less than five months. Parties are already in election mode, with the first few salvos fired during the state elections. Change seems to be in the offing, and businesses will have to re-calibrate plans to match the altered pace of decision-making that precedes a national election.

Ashutosh Sinha, a business journalist with a media career spanning both print and broadcast, is currently Executive Director – CFO Institute at 9.9 Media. The views expressed here are his own.