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Under the Banyan Tree - India's election: The economics of a surprise result
24 Plays1 year ago
Pranjul Bhandari, Chief India Economist, joins Fred to discuss the macro and market reaction to India’s landmark national vote, as well as the outlook for economic policy and reforms. Disclaimer: https://www.research.hsbc.com/R/101/vRqk9TD . Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
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Transcript
Introduction to Podcast
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Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Make sure you're subscribed to stay up to date with new episodes.
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Thanks for listening.
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And now onto today's show.
Indian Elections Overview
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This is a podcast from HSBC Global Research, available on Apple Podcasts and Spotify.
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However you're listening, analyst notifications, disclosures, and disclaimers must be viewed on the link attached to your media player.
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Welcome to Under the Banyan Tree, where we put Asian markets and economics in context.
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I'm your host, Fred Newman.
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The votes are in in the world's largest democracy, a win for Prime Minister Narendra Modi, but by a smaller margin than expected.
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What made Indians vote the way they did?
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How are markets responding?
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And what is the outlook for growth and economic reforms?
Unexpected Election Outcomes
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Chief India economist Pranjal Bhandari joins me to answer those questions and many more.
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It's time for you to join us Under the Banyan Tree.
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So a few numbers off the bat to set the context.
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The coalition led by Prime Minister Modi's BJP party secured some 290 seats.
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That's more than 272 needed to secure a majority, but it's also far fewer than exit polls were suggesting.
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It's also the first time since Modi's party came to power that it has failed to secure a majority on its own.
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The BJP alone won 240 seats, a far cry from the 300-plus it secured in 2019.
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Let's bring in Pranjal now.
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Pranjal, great to have you with us.
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Great to be here, Fred.
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So big surprise out of India this week.
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The market swooned up on Monday, down on Tuesday.
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A real rollercoaster ride in terms of the reaction to this election result, which of course showed a narrow majority for the governing coalition than many had expected.
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Give us a sense.
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What really happened in the last few days here?
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Why this big seesaw in financial markets, this roller coaster in the last several trading days?
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Yes, absolutely.
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So, you know, we had the opinion polls on the elections about two months ago, which said that the BJP bill will be back with a large majority.
Market Uncertainties and Coalition Needs
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And then we have the actual election process, which ran over six weeks ago.
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And there the news coming from the ground wasn't that great and markets didn't do well for a couple of trading sessions.
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And then in the weekend, we had the exit polls, which showed that the BJP will come back with a bigger majority than in the past.
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And then the final election results on Tuesday, which were quite the opposite.
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So a big swoon here, partly, and this may be a technical question, I suppose we relied a bit too much on opinion polls and they weren't quite as reliable.
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Does India have a sort of an issue with opinion polls?
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Is it harder to estimate public opinion in India than other economies?
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I mean, it's over 1 billion voters.
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I mentioned, I imagine it's statistically much harder to capture.
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Yeah, but you know, interestingly, over the last 15 years,
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exit polls and opinion polls had started to get it right, especially the direction of change right, even if they didn't get the exact seat shares on the dot.
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So this one was a surprise that they got it so wrong.
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And I think there'll be a lot of analysis trying to understand what really went wrong.
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But yes, I think the exit polls are the one which sort of created a huge amount of uncertainty in the markets.
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But Fred, I really wanted to bring in one or two other points.
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I think
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couple of reasons why the markets reacted the way they did on Tuesday.
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One is this whole BJP, you know, in the past elections, they had come in with 303 seats.
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The midpoint to get a government is 272 seats.
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And just by themselves, you know, they had formed the government.
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They didn't even need their coalition partners.
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And this time around, they'll need the coalition partners.
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And that's going to be a big change in the way the government functions.
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I think that's one part of uncertainty.
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The other part is, you know, Mr. Modi, he had a very strong hold in the Hindi heartland, particularly the state of Uttar Pradesh.
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And the BJP lost a lot of seats there.
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So they are loosening their grip on the Hindi heartland, something that was just not expected.
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And then a third form of uncertainty is the chance that there could be defections.
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You know, people moving from one party to another, which could complicate the final results.
Economic Growth vs. Electoral Success
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So the market is grappling with all of these at this point of time.
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So the market is grappling with uncertainties.
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And I want to unpack that a little bit.
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But before we do that, let's just look at why perhaps we have this problem.
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contrary to expected results.
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You know, if you're looking from afar, India is doing very well.
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It's an investor darling.
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We've seen very strong growth, capital inflows into India.
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There was, you know, we're seeing, we're continuously push up our growth forecast for the economy.
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India, on many measures, has been doing very, very well.
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Why is it that perhaps that economic success
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hasn't led to the same traction at the ballot box?
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Why has the government maybe undershored expectations, given that most Indians should feel fairly good about the economy?
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Yeah, so I like to break down India into new India and old India.
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And it's new India, which has all the high-tech sectors, electronics, services exports, which has been doing very well.
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The problem is it's only 15% of GDP.
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growing very rapidly it's growing at 15 per year but it's just very small and then the rest of india which i call old india which makes up agriculture and small firms is 85 percent of gdp and has been growing at a at a smaller clip of about five percent and i think it's stress in old india which i think you know created the surprise sort of uh result in in elections and what didn't really help was you know a lot of climate change events uh that have multiplied over the last couple of years
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Over the last 24 months, the El Nino didn't help.
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For the first time, the El Nino not just impacted rainfall, but they also pushed up temperatures.
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So it wasn't just the crop production that hurt, but also a lot of livestock and a lot of occupations of the rural Indian came under stress.
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So I think climate change and the result on inflation, unemployment, I think all of that played a role in the election results.
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Now, I think you make a very interesting point here that, firstly, part of the population didn't really feel as big a lift from the strong economic growth as you might think.
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And the second one is the impact of climate change and how that really affects the most vulnerable people.
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members of society.
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And I think the read across then to other economies is that if climate change pressures intensify, that that might have political consequences elsewhere.
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But I wanted to hark back a little bit on this idea.
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The Modi government, as I understand it, has been somewhat responsive to the needs of the broader parts of population.
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Famously, there is a massive food support program, I think 800 million
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Indians have access to state
Post-Pandemic Economic Policies
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food support, for example.
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Are you saying that wasn't enough to bridge the gap?
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Was there not enough focus by the administration on these issues?
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Or do you just think the scale just overwhelms even government resources?
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Yeah, I think the food distribution program did very well through the pandemic period.
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It fed large parts of the economy.
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But over the last year,
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the Indian government was bringing down a lot of the subsidies that had gone up in the pandemic time.
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And actually the fiscal deficit was falling in a major way.
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The government was really cutting back on expenditure.
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So one can argue that they didn't do enough welfare spending.
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In fact, markets were expecting a pre-election cash handout, which never came.
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So, you know, one can argue there wasn't enough.
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But I think this also means that going forward, welfare spending could rise in the economy.
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Now, I don't think that's necessarily bad because India is going through a period in which tax revenues are going very rapidly.
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So high welfare spending and bringing down the fiscal deficit can all coexist.
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You can do welfare spending responsibly.
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And I think we're going to see more of that going forward.
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That's interesting.
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And you already kind of foreshadowed a little bit what we wanted to talk after the break, which is really what the implications are of the Indian elections for economic policy going forward.
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So this is perhaps a good point to take a quick break.
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And when we come back, we'll look at what's next for the Indian economy.
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Well, Pranjal, we discussed before the break, obviously, the surprise election result.
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We looked at some of the possible reasons why we saw a different election outcome than was expected.
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And you also suggested that maybe one of the implications of this election result is that we might see more social spending, rural spending going forward as sort of the neglected part of societies get more attention by the political system to kind of
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garner the votes for the next time.
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I also wanted to look a little bit about the point you made very early on, which is coalition politics.
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The BJP had a majority in the last parliament.
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Now it's reliant on coalition partners.
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And you hinted at the fact that that might bring in a bit more uncertainty on policymaking.
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Can you explain that a little bit further, what you mean by that?
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So my sense is that the markets are worried about the fact that the government in the next five years will look very different from the last five years.
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But I don't necessarily think that's a problem.
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Mr. Modi's big win in the last election when BJP alone had got 303 seats was actually not normal.
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It was out of the ordinary.
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Never before have we seen one single party get such a high margin of victory.
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And the fact that his
Continuity in Economic Reforms
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BJP's vote share has fallen to about 240 now
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is actually in line with normal.
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So our sense is in some way, you know, we're coming back to normal and we shouldn't be so scared about this.
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Also, the fact that Mr. Modi will now need his coalition partners may not be bad because many times in the past, for example, India's 1991 reforms were with big coalitions.
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You know, you sort of do consultative processes.
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You actually get a lot more reforms done than if you do it alone.
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You know, we've seen that in the past as well.
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Also, we see a remarkable continuity in reforms.
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I think most governments that come on board have really batted for the same reform, GST, the insolvency and bankruptcy code, public digital infrastructure.
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So my sense is, you know, whatever the government is, I think we'll still continue to see the same reforms that we have gotten used to in the last couple of years.
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And finally, a strong opposition, you know, it's not a bad thing.
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You know, it's great for checks and balances and it's great for democracy.
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That's very encouraging.
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And I think the point you made that a consultative government might sometimes be better able to push through far-reaching reforms because it brings other players in society along with it.
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But there are sort of a couple of reforms, I think, that investors would look for to really drive India's growth.
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I'm thinking about labor market reform.
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I'm thinking about
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land reform, for example.
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There's maybe also more that could be done on the fiscal side.
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Those might be the big three ones.
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Do you see any material progress on these big issues, or do you think we're going to see more of a marginal reform effort in the coming years?
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So I think there's both good and bad news here.
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I think the good news is that some of the reforms that Mr. Modi was already doing in the last couple of years will continue.
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And these include things like the government's big capex push, wooing futuristic sectors into the economy like semiconductors, electronics, EVs, keeping a close watch on macro stability, lower inflation, lower fiscal deficit.
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I think all of that will continue.
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Interestingly, all of this is via executive action.
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It doesn't need any bills to be passed.
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So I think all of this will continue.
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But anything that needs bills to be passed, land reforms, labor reforms, farm reforms, I think all of that could become slower than before.
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But then the truth is, it's not that it was a priority in the last couple of years anyway.
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So the good news is what was happening should continue.
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And I think that relates to about 6.5% growth in the medium term.
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But had India been able to do legislative reforms, then growth
Trade, Climate, and Politics
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could have been even higher, close to 8%.
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And perhaps that part is something that comes a bit into question.
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So we're certainly going to have still some positive reforms at the margin.
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We're still relatively constructive on economic growth.
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Some reforms coming through, particularly from the executive side.
00:13:52
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One other big, big issue has been trade and India's connectivity with the rest of the world.
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For some time, the Indian government has been probably, it's fair to say, more reluctant to sign free trade agreements.
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We've seen a bit of a loosening of that in recent years.
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Do you expect any material progress on the trade reform side?
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Yeah, I think India is really reaching out and sort of forged trade agreements with different parts of the world.
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And I think that's a slow process, but it's moving in the right direction.
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And my sense is that should continue.
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If it's able to bring down its import tariffs, something that's been raising in the last couple of years,
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I think that will really aid India's sort of trade aspirations.
00:14:37
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But I see no major change.
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You know, if this government comes back with Modi as a prime minister, but with a coalition and a strong opposition, I don't really see any big threat to things like, you know, their outlook on trade.
00:14:51
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So that's broadly, I think, encouraging for the economic outlook still for India.
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Maybe things don't change as much as markets had kind of thought in their immediate reaction to the results.
00:15:05
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One last point, Pranjo, which is climate change.
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You mentioned before that maybe climate change has had some role here in kind of
00:15:16
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giving the electorate something to maybe blame political leaders for or be less enthusiastic about voting for the current government.
00:15:24
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Do you think we're going to see, as a result, a further strengthening of climate change-related policies in India?
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The link is, of course, not as direct.
00:15:34
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But do you think this would maybe spark even more of an effort to shift India's green energy revolution, to shift towards more sustainable farming and to kind of build up the resiliency, particularly of the agricultural sector?
00:15:49
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Absolutely, Fred.
00:15:50
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And you know what?
00:15:51
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Right after the elections ended, Mr. Modi had his first policy meeting and it was on the heatwaves that are going on in the country right now.
00:16:00
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So you're absolutely right.
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I think the message is clear.
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Climate change can do a lot of damage and it really hurts livelihoods because today 45% of India's population are still involved in the agriculture sector directly or indirectly.
00:16:15
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And I think that message has gone on pretty clearly.
00:16:19
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And maybe that's the biggest silver lining of all then, that really climate change is moving up the political agenda, not just in India, but of course in other places in the world as well.
00:16:28
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And we need urgent action on this front, particularly to protect people in more vulnerable situations, particularly in economies like India, across Southeast Asia and elsewhere.
00:16:40
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in the
Podcast Wrap-Up
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world, of course.
00:16:41
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So thank you very much, Pranjul.
00:16:43
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I know this is a very busy week for you.
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So thanks for taking the time and joining us under the banyan tree.
00:16:53
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And we're going to have to wrap it up here, folks.
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This is a story we've covered in depth.
00:16:57
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So if you're a global research client, do check out our multi-asset reaction to the Indian election, led, of course, by Pranjo.
00:17:06
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My regular co-host, Harold, returns to the pod next week.
00:17:08
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Until then, do have a listen to the Macrobrief, our sister podcast that puts the week's top economic stories in the spotlight.
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From all of us here at Banyan Tree headquarters, take care till next time.
00:17:38
Speaker
Thank you for joining us at HSBC Global Viewpoint.
00:17:41
Speaker
We hope you enjoyed the discussion.
00:17:43
Speaker
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