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Opinion

After Gujarat setback, Modi to redouble effort to win back voters

Prime minister could consider fiscal handouts before 2019 national election

Most Indian political experts had predicted that the ruling Bhartiya Janata Party (BJP) would comfortably return to power in Gujarat which is Prime Minister Narendra Modi's home state and original power base.

Whilst poll results on Monday showed that the BJP was indeed set to return to office, the probable diminished margin of victory as compared with the main opposition Congress party is striking. The BJP's lead over Congress in the state assembly has collapsed from an average of 66 seats (a third of the total seats) over the last five assembly elections to a dramatic low this time of under 20 seats.

Given the setback, Modi and the BJP high command could be forced to think hard about their recent policies. In particular, they may be pressed to address the public anger expressed by small businesses against demonetization -- when 86% of currency in circulation was suddenly withdrawn -- and by traders against the hasty implementation of the Goods and Services Tax (GST). With more state elections due in 2018 and a national vote in 2019, there may be little time to waste.

As a result Modi's ability to take unilateral decisions could be curbed. The BJP as we know today is an edifice that rests on three pillars, namely Modi himself, party boss Amit Shah and the BJP's election-running machinery and, lastly, the Hindu nationalist group RSS (Rashtriya Swayamsevak Sangh which is the parent organization of the BJP). The setback in Gujarat is likely to empower Shah and the RSS high command which could manifest itself in the form of the BJP taking a more aggressive stance on social, communal and cultural matters.

But, the curbs on Modi's ability to take unilateral decisions may not reduce his capacity to drive economic policy. This is likely mainly because the other two units of the BJP party that is the vote-winning machinery and the RSS have been focused from inception not on economics but on politics, education, society and culture. Even though the prime minister is still learning on the job when it comes to matters like fiscal policy or the external account, he is the most experienced in his team in economic policy-making.

Modi's rise symbolizes India's adoption of "strongman economics" -- a form of populist ad hoc policy-making that has come to life in several emerging economies -- notably Turkey, Russia and Brazil -- in reaction to the 2008 global economic crisis and the apparent failure of liberal market economics.

We expect Modi to stick to his approach. Specifically, we expect him to focus on a continued crackdown on black money, the continued curbing of powers of businesses built on political connectivity and the rise of a razor sharp focus on reflating the economy via fiscal means.

Land of inequalities

India continues to be a land of eye-watering inequalities and hence pursuing a black money crackdown in such a country to earn the trust of the poorer voter makes logical sense. The French economist Thomas Piketty's latest findings on India's income distribution suggests that even as India's per capita income today is $1,850, the bottom 50% of India earns a shockingly low $400. At the other end of the scale, the top 1% of India's population earns $53,700 per head, which is in fact higher than the per capita income of Singapore.

Meanwhile, the continued curbing of powers of the so-called crony capitalists is a natural extension of cracking down on black money. The effort at creating laws that ensure that time-bound bankruptcy proceedings take place fits this approach.

Finally, much like its predecessors in government, the BJP is likely to be focused on reflating the Indian economy by all means in the run-up to the general elections of 2019. Injecting money into the banking system to recapitalize public sector banks, continuing to extend relaxations on the GST front and an explicit increase in central government revenue expenditure are likely to follow.

In summary we expect the sobering Gujarat election results to trigger a degree of political reassessment but then we expect Modi to stick with his brand of ad hoc economic policy-making. Once a nationalist strongman, always a nationalist strongman.

Ritika Mankar is senior economist at Ambit Capital.

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