Narendra Modi’s historic win in Uttar Pradesh is precisely what the doctor ordered for both the economy and the markets. The name of this tonic is confidence. Confidence, more usually called “sentiment”, is what drives the markets. Confidence, aka animal spirits, is also what often drives the economy.
The domestic business outlook had turned gloomy in recent times, thanks to a host of reasons, which included demonetisation, no matter what the official GDP numbers show. Reserve Bank of India surveys had seen drops in both consumer confidence and the industrial outlook. The latest purchasing managers’ surveys for February found muted levels of optimism. Of course, there has been a recovery from the depths plumbed last December, at the height of the pain from demonetisation. But the recovery is proving to be slow and tentative.
There were many reasons for that, foremost among them being the unsettled external environment, thanks to Donald Trump’s protectionist bias, the increase in geopolitical tensions and worries about more countries exiting the European Union. At home, people were unsure whether demonetisation had led to Modi losing political capital.
The domestic concerns on the political front have now dissipated. The Modi victory, even after the disruption caused by demonetisation, sends out several signals. These are:
1) As reporters had repeatedly emphasised, demonetisation had mass support. People want an end to the status quo, where the rich got away by not paying taxes and accumulating undeclared income. The assault on black money is likely to go full steam ahead. Modi’s attempt to purify the Indian nation seems to have been resoundingly endorsed.
2) The prime minister will feel that his policies have been vindicated and he will feel emboldened to continue down the political and economic path he has been travelling.
3) That will mean further reforms. For those who labour under the misapprehension that the government has not been implementing reforms, a glance at the long laundry list of key policy actions carried out by the government mentioned by the IMF in its latest country report on India will be instructive.
4) The vindication of its demonetisation decision will encourage the government to continue with measures to widen the ambit of the formal economy and shrink the informal economy. The war on cash will likely be renewed.
5) It will signal that the Modi government will very likely continue in power even after 2019, ensuring political stability.
6) The government will continue with its efforts to increase the ambit of Aadhaar and link it to its social programmes. This will also lead to India becoming a modern surveillance state. That will be part and parcel of Modi’s effort to increase state capacity and transform India from a soft state to a hard one, on the lines of the East Asian model.
7) India’s high economic growth rate has earned it praise from the IMF, the World Bank, the OECD and international investors. The Indian stock market has consistently traded at a premium to its Asian peers. The victory in Uttar Pradesh will increase the attraction of India as a destination for foreign capital, all the more so when political uncertainty looms large over several other countries. The likelihood of political stability and ongoing reforms will add to the attraction.
8) The markets are already seeing large inflows from domestic investors, in anticipation of a pick-up in the business cycle. This trend will be reinforced.
Politically, the Uttar Pradesh victory will signal that the vision of a resurgent Bharat, which is at the heart of the BJP’s political, social and cultural agenda and which was how Modi packaged demonetisation, seems to be paying off. Other political parties seem to lack a competing vision. The BJP leadership may also interpret the party’s success in Uttar Pradesh as indicating their social and cultural programmes have mass support, regardless of what the chattering classes say.
This does not mean, of course, that everything will be hunky-dory. Domestically, investment demand is yet to pick up. Higher oil and commodity prices could prove spoilers. The external environment continues to be fraught with grave risks. The assault on the informal economy may hurt demand. And the lack of jobs could yet prove to be a disaster waiting to happen. But increased political confidence will, at the very least, act as a bulwark against pessimism, while it could very well, by reviving animal spirits, lead to a more rapid recovery.
For the longer term, the victory in Uttar Pradesh, even after a major disruptive event such as demonetisation, suggests that perhaps the party best able to manage the contradictions arising out of developing capitalism in India is the BJP. It also, at the current juncture, seems the most capable of reconciling the tensions that arise between the demands of capitalist development and democracy.