Business, Finance & Economics

India's economic stimulus? Politics.


BANGALORE — It took a mere weekend for Rajan Malik’s mood to do a complete cartwheel.

The Mumbai-based CEO of Eatwel India, a company that owns a franchise of the American fast food chain Subway, has operated under tough economic conditions these past few months, keeping costs under check and growth plans on hold.

When India’s parliamentary election results started pouring in on Saturday, Malik could not contain his optimism. “We will have a stable government,” he said, “Prime Minister Manmohan Singh is an Oxford-trained economist and he is sure to do a good job."

On Monday, when the stock markets hit the upper trigger within seconds of opening and the benchmark index posted a record 17 percent gain, Malik made up his mind. He would add two more Subway stores to the three he already operates in Mumbai’s Andheri suburb.

Within the next 12 months, he plans to add another two to take the total to seven Subway stores. “Things will look up, people will start spending money,” predicted Malik, explaining his thought process.

In an economy driven as much by sentiment as by fundamentals, the decisive and astonishing return of the Congress Party-led UPA alliance in the election has served as a big mood-booster in India's business community. Singh, who will be prime minister for a second term, is credited with shepherding the start of India’s economic liberalization in 1991.

For several successive years until last year, India’s economy had grown at the world’s second-fastest rate of between 8 and 9 percent, primarily fuelled by a large domestic economy and the rising consumption of a growing Indian middle class.

The economy has since cooled, but India’s business leaders are taking great comfort in the fact that the government is not held hostage by a coalition of political parties as it was in the past, with each pulling in a different direction.

The communist parties that backed Singh in his last term, for instance, were vehemently opposed to disinvestment in state-owned firms, labor reforms and opening up sectors such as banking and insurance to foreign investors.

“Business can take solace that a stable government is reasonably assured for the next five years and India can pursue economic policies that pay off,” said Ajit Ranade, chief economist of the Mumbai-based industrial conglomerate, Aditya Birla Group.

Singh’s last term was shaky on several occasions. Regional parties and the communists that propped up his coalition virtually blackmailed the Singh government on key issues, by threatening to withdraw their support.

This time around, in several states, the voting pattern showed a correlation between victory and local governments’ performance.

Of course, challenges remain.

Singh may swear in a dream team of high-performers in his cabinet, but it would still be a tall task for the government to fix India’s shaky infrastructure, its huge budget deficit, its corrupt bureaucracy and the leakages in its social spending, all within its five-year term.

"It will be a challenge for the government to deliver on high expectations," economist Ranade warned.

Still, India is likely to be a big destination for foreign investors who come in shell-shocked from the recessionary economies of the West, said Bangalore-based Vijay Angadi, managing director of the New York-headquartered Novastar International Fund. The predominantly U.S. fund manages the wealth of several prominent New York families, including many billionaires.

Key economic indicators such as car sales and cement production have been veering to the positive in the last couple of months. The certainty of a stable government would further investors, Angadi says.

“A lot of money will come in from overseas now, our investors are guardedly optimistic about India,” Angadi said.

More on India's politics and economy:

Congress wins big

The Gandhis: A Guide

The Nano is burning rubber