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Results of the state assembly elections on 8 December found that voters in four out of five states had dealt an unsurprising blow to the Congress party. The stock market duly rose the next day, reinforcing the narrative that ushering in the Bharatiya Janata Party (BJP) will automatically modify India’s growth trajectory to a higher rate. While it would take superhuman incompetence to match the abysmal record of the Congress-led United Progressive Alliance (UPA) government at the Centre, the belief that one party or leader can instantaneously change everything for the better is too facile. As this column has discussed previously, the structural problems facing the Indian economy can only be solved over time.

However, this is not to say that politics makes no difference to economic outcomes. Indeed, good leaders and good policies do make a difference. The difficulty is in figuring out ex-ante which candidate and party offers the two. “It’s obvious," I hear you murmur. Let me point out the “dream team" of Manmohan Singh and P. Chidambaram that opened the UPA’s second innings. For the first time in Indian history, the stock market was halted limit-up a minute after it opened following the UPA’s election win in 2009. The markets went up more than 17% that day and you would have laughed at anyone who predicted anything similar to that shown in Graph 1.

This problem of ex-ante identification is made more difficult by the fact that election manifestoes are vague letters of intent rather than concrete promises. In addition, the mismatch between the economic and political cycles does not help. New incumbents take the credit for growth even if it was due to the groundwork done by a previous government. All problems, of course, were created by the previous administration. How does one then rationally evaluate candidates and parties?

One way is to look at governance and economic outcomes for clues and take a long enough period that encompasses at least one whole economic cycle (with both boom and bust). A decade, for example, is enough to showcase governance capability or the lack thereof. Data from the Indian states, which are a microcosm of larger India, can be used to make meaningful comparisons. Looking at the 2003-13 decade, all the 28 Indian states can be divided into six groups based on which party ruled them (Graph 2).

These groups allow some fact-checking of the claims made by political parties. Looking at growth data, the current market response seems to be somewhat justified. States under BJP rule have experienced faster growth compared with those ruled by the Congress party and India as a whole under the UPA (Graph 3). However, states that turf out the incumbents, alternating between parties every election, seem to have done even better. The best performers, both on a total and a per-capita basis, are the states under regional parties such as Bihar or Tamil Nadu, with power alternating between regional parties.

Growth in itself is not enough, especially in a developing country such as India. To reach its full potential, the country needs to develop its human capital. Therefore, good governance has to be measured by these outcomes as well. Perhaps the two most important metrics for this measurement are the literacy rate and sex ratio. The former indicates the number of people who have the opportunity to constructively engage in today’s sophisticated economy, and the latter is a measure of equality between the genders. It is only by maximizing both that India can hope to graduate to the developed status as other Asian countries have done in the past.

Based on this quick analysis, “a plague on both your houses" seems to be a rational response by voters disillusioned with the two main national political parties—the Congress and the BJP.

However, at the Centre, the quality of leadership becomes important, whether it is to hold a coalition together or to force disparate elements towards a common goal. Here, purely looking at averages glosses over extraordinary leadership. For example, lumping Uttar Pradesh in the states ruled by regional parties does Nitish Kumar a disservice. Similarly, Narendra Modi’s economic performance is dragged down in the BJP average.

Of the six big states (cut-off taken as more than 20 million in population), chief ministers who have led their states for roughly a decade, Bihar’s Nitish Kumar shines through, with Gujarat’s Modi close behind on economic performance but lagging in human development, especially in his failure to improve the shocking sex ratio in Gujarat (Graph 5). Having won popular mandates and demonstrated their abilities, both are credible leaders for India. However, the political calculus at the Centre with the stability (and weight) that a large party brings favours Modi. Fractious coalitions are kryptonite to an able leader, sapping most of his energy in pointless intrigues.

In conclusion, the markets are right to cheer the BJP victories in the state polls compared with the prospect of a Congress government. Nearly anyone apart from the Congress seems to do a better job at governance. However, the Centre needs a relatively stable government not held hostage to the whims and fancies of coalition partners. This implies that the outcome most favourable to the economy and markets is a Modi-led government where the BJP has sufficient number of seats to ensure that one person’s sulk doesn’t end up in a general election. There still hangs a question mark on whether such a government can deliver on the human development front. Voters will ultimately decide if this risk is worth taking compared with the risk of bringing in an inexperienced, cliché-spouting “young" dynast.

Shashank Khare is an investment professional and writer. After studying engineering at IIT-D and business administration at IIM-A, he entered the world of credit derivatives before CDS became a four-letter word. Having successfully batted through the crises, he now indulges his passion for economics, finance and policy through writing and trading.

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