Growth in gross value added, or GVA, in the agriculture sector was a mere 1.7% from a year ago. Private consumption growth was the slowest in the past eight quarters. Growth in the construction sector, a major source of jobs for the masses, was only 2.6%. The goods and services tax (GST) has been a blow to the informal sector. Large sections of traders, faced with the unpleasant prospect of having to pay taxes for the first time, are up in arms. In short, there are plenty of reasons for voters to be dissatisfied.
To be sure, the Uttar Pradesh elections resulted in a big victory for the Bharatiya Janata Party (BJP), in spite of demonetisation. But take a look at the accompanying chart, which shows the results of the consumer confidence survey by the Reserve Bank of India (RBI). The chart tracks the percentage of the people surveyed who feel that economic conditions, income and employment would improve a year ahead. Note that demonetisation resulted in an increase in optimism. For example, the percentage of people who felt that economic conditions would improve was 66.3% in December 2016, during the high noon of demonetisation, compared with 57.7% in September 2016. Even in March 2017, around the time of the UP elections, the percentage of people who thought economic conditions would improve was a majority.
RBI’s November 2017 survey, in contrast, shows that only 45.2% of people believe that economic conditions will improve a year ahead, which is the lowest percentage since the Narendra Modi government came to power at the centre. It also means that a majority of those surveyed believe that economic conditions, income and employment prospects will either worsen or remain the same a year from now.
That is an extraordinarily negative view to take.
While people believed the government’s claim that demonetisation would be good for them, they are showing a remarkable degree of scepticism about the beneficial effects of GST.
Once bitten, twice shy.
To be sure, the perceptions, at least about economic conditions and income, are probably wrong, as all the experts say the economy has bottomed out and growth will be much stronger a year from now.
But, as politicians know very well, perceptions matter.
There are other interesting things about the chart. It shows that while pessimism about the economy is widespread, it’s still not as bad as it was for most of 2013.
This should be comforting for the ruling party.
The chart also shows the euphoria when the Modi government took power—the percentage of people expecting their incomes to rise a year ahead went up from 41.7% in September 2013 to 67% by September 2014. But it’s very clear from the chart that those high hopes have since fizzled out.
Of course, there are many other factors, besides economics, that sway voters during an election. All that we can say is that the ruling party faces headwinds from the current economic conditions. Whether the opposition can effectively capitalize on them is another matter.
Gujarat is the birthplace of the economic model named after it. In political economy terms, this model is based on large scale industry driving growth, while the Hindutva ideology papers over and manages the contradictions and fissures that this kind of development generates. Add a hard state to the mix and you have the Gujarat model. It is capitalism with Hindutva characteristics. It is, in some ways, an Indian approximation of the very successful East Asian model. Selling economic reforms to the masses has always been difficult in India, and it’s possible that the capitalism-plus-Hindutva combination offers a way out. When selling the development story is tough, you could always try the other one. So the Gujarat elections are important because it will be a test of the resilience of the model under strained economic conditions.
Few political pundits, however, are predicting a result that will rock the boat; doubtless, given the state’s status as the laboratory of Hindutva and the ruling party’s ground-level army of ideologically committed Rashtriya Swayamsevak Sangh (RSS) workers.
Indeed, the stock market believes the Gujarat elections pose no challenge to the BJP. The MSCI India equity index has done better so far this month against the MSCI Emerging Markets Asia index as well as the MSCI EM index. It wouldn’t have done so had the investors felt that there was a chance of the BJP losing Gujarat. Any reversal for the ruling party will, therefore, be a shock for the markets.
On the other hand, a convincing victory by the ruling party will not only reinforce political stability, but will also encourage the central government to continue with economic reforms, regardless of the costs involved. More importantly, it will prove once again the robustness of the capitalism-plus-Hindutva model.
Manas Chakravarty looks at trends and issues in the financial markets. Respond to this column at firstname.lastname@example.org