India's State Elections Provide the Prospect for Liberal Economic Reform

Though not capturing many headlines in the United States and elsewhere, India’s five on-going state-level elections could have important consequences for the global economy, and for Indians and non-Indians alike. India’s state elections can be viewed as a vote of confidence in the corruption and scandal-plagued ruling Congress Party. If the Congress Party and its allies win elections in several key states, it will bolster the Congress Party’s political capital and could allow Congress officials to push through liberalizing economic reforms.

Potential reforms, such as lifting the cap on foreign direct investment (FDI) in many financial services to 49% and permitting foreign-owned multi-brand retail, would undoubtedly be a boon for the private sector. However, corporations are not the only individuals that stand to benefit from economic reform. By increasing economic efficiency and providing greater access to products that are essential to supporting India’s growing middle class (insurance policies, for example), individual Indians stand to benefit hugely from liberalized FDI restrictions. Multi-brand retail companies such as WalMart could introduce modern supply chains and logistics that would stem the egregious agricultural losses due to the spoiling of crops before they ever reach market, benefitting consumers and producers alike.

On a national level, these reforms would slow the alarming decline in FDI that a rapidly developing country such as India needs to maintain growth. Though India’s economy grew by 10.4% according to the IMF’s World Economic Outlook, FDI flows into India dropped by a third, suggesting that India’s growth may be unsustainable in its current regulatory regime, or that at best it is performing well-below its potential.

That the Communist Party of India (CPI), India’s strongest anti-reform party, could be unseated in two of the five elections highlights the potential for economic shift. In West Bengal, the Trinamool Congress (a Congress Party ally) has a strong chance of unseating the CPI, which has held power in West Bengal since the 1960s. In Kerala, power regularly shifts between the Congress Party and the CPI, and it is highly likely that the Congress party will unseat the incumbents.

Though the election results will not be announced until May, early indicators suggest Congress will do well. If those analyses are correct, the state elections could provide the momentum needed to push through long-stalled economic reform that will benefit India and the global economy.

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