India: Gujarat and the general election

December’s Gujarat state election is seen as a litmus test for the general election due no later than May 2019.

A litmus test election

The Indian state of Gujarat goes to the polls next month in a two-phase (9 and 14 December), first-past-the-post single round election for all 182 seats in the state’s legislative assembly. Over 43 million Gujaratis are registered to vote.

From 2001 to 2014, the Chief Minister of Gujarat was Narendra Modi, now Prime Minister of India. It is, therefore, widely seen as a stronghold of Mr Modi’s right-of-centre Bharatiya Janata Party, which, under his stewardship, won a clear majority of 116 seats in the previous (2012) election. Indeed, the BJP has held power there for 22 successive years now.

In the immediate aftermath of a handful of state elections earlier this year in which the BJP performed very strongly, not least in bellwether state Uttar Pradesh (UP), the general consensus was that another victory in Gujarat this year would be a comfortable stroll for the BJP. However, visiting India myself four weeks ago I found a growing belief that the race could turn out to be a lot tighter than expected. This sense appears to be borne out by opinion polls (which, please note, are not always very reliable in India) which point to a general decline in support for the BJP since August when the party was forecast to win something between 144 and 152 seats. The most recent poll I have seen puts it at 113-121 seats, ie still a solid majority (and consistent with the outcome of the past two elections) but disappointing relative to earlier expectations.

This is important. Although Mr Modi is not, of course, standing in the Gujarat himself the election there is nevertheless — and not unreasonably — seen as something of a vote of confidence in his government and, therefore, the BJP’s prospects in a general election due to be held no later than May 2019.

Making a rod for its own back

So, what exactly is going on to bring this apparent swing away from the party of a man who remains something of a hero in the Gujarat thanks to its remarkable economic transformation under his stewardship?

The two factors to which the apparent slide in support for the BJP is most commonly attributed are: the November 2016 demonetisation and related economic slowdown; and the roll-out on 30 June of the long-awaited General Sales Tax (GST).

Demonetisation twelve months or so ago saw around 86% of bank notes then in circulation suddenly voided as part of Mr Modi’s (very popular) anti-corruption drive. Coincidentally arriving in India on the day the voiding took place, I experienced personally a small part of the major inconvenience this caused first-hand and can testify that it was very real. Nevertheless, my firm impression was — and, largely, remains — that the move was and is popular with a majority of ‘ordinary’ Indians, even though there are now some real question marks over the extent to which it achieved its stated objectives. Nevertheless, as Nilanjan Mukhopadhyay noted in a recent op-ed for Bloomberg Quint:

“The Gujarat election is the first poll that will determine whether support for demonetisation remains or has fizzled out.”

Furthermore, it would be entirely fair to say that demonetisation has been a major factor in the slowdown in the economy from 9.1% growth year-on-year in 2016Q1 to ‘just’ 5.7% in 2017Q2.

[Note: To be fair, demonetisation is certainly not the only cause of the economic slowdown. However, the Modi government can also reasonably be held responsible for at least one other. As The Economist (subscriber access only) noted:

“As with demonetisation, the GST roll-out appears to have been sloppy and hasty. A more recent reform, a big bail-out of state-owned banks saddled with some $150bn in rotten loans, is neither of those things. The rescue package is cleverly devised, but woefully late: Mr Modi had ignored repeated warnings, notably from Raghuram Rajan, his own central-bank chief who was sacked last year, that the debt pile was smothering investment.”

At the same time, investors will have noted that Moody’s have attributed their recent rating upgrade for India in part to demonetisation and the GST, which the agency sees as important ingredients in improving the stability of the economy in the medium-term. However, whether Moody’s move will mellow voter opinion generally remains to be seen.]

As for the GST, no-one doubts the importance of what is almost certainly the biggest single tax reform in India since independence in 1947. However, as The Economist (subscriber access only) put it:

“Mr Modi triumphantly declared the GST a ‘good and simple tax’. But he did not listen to his own advisers’ suggestions on how to make it so. He plumped for six rates instead of three, burying small businesses in paperwork and allowing politics to seep into the rules (the government recently cut the rate on khakras, a popular snack from his home state of Gujarat, from 12% to 5%). He is now suffering the consequences, as businessmen across India howl at the complexity.”

On these counts at least the BJP has only itself to blame. And it stands to suffer the consequences in Gujarat in particular, a state which is home to a large number of the small traders, already battered and bruised by demonetisation and the economic slowdown, who have arguably been hit hardest by the excessive bureaucracy in which the GST is embedded.

Anti-incumbency at work?

Writing about Indian elections regularly for the past two decades or so, one factor which has almost always had to be weighed is Indian voters’ notably propensity for anti-incumbency. For the whole of those two decades, however, Gujarat has defied this tendency. But does this exception to the general rule still apply?

Again citing Nilanjan Mukhopadhyay of Bloomberg Quint:

“[Gujarat] is the first big and politically significant state since [Mr] Modi became Prime Minister [in 2014] where the BJP is not a challenger attempting to depose the ruling party but is the incumbent…. The principal test that the BJP faces in Gujarat is that unlike in other states, for instance in UP most recently, and previously in Haryana and Maharashtra where it could go to people by shaming the state government and accusing the government. In Gujarat, it is the incumbent and has to ward off any negativity that may have accumulated over the years…. The yardstick of judging the BJP government in the state will mainly be based on comparing life when [Mr] Modi was chief minister and thereafter. The fact that there have been two chief ministers since then, is a big negative because it establishes that post-Modi, the BJP has struggled to put up a credible leadership.”

Rahul re-booted?

Following the battering it took in the March state elections (not to mention the 2014 general election), in June India’s ‘grand old party’, the Indian National Congress (INC), announced that its leader-in-waiting, Rahul Gandhi (who is expected to be elected President of the party before the Gujarat vote), had a blueprint for its revitalisation. How effective this will prove to be in lifting the party’s fortunes remains to be seen. But what is already clear is that Mr Gandhi himself, a serial under-performer in past elections who had been written off by many as a political leader, has significantly lifted his own game. Indeed, his campaigning to date in Guj arat has been nothing short of a revelation. As The Economist wrote earlier this month (subscriber access only):

“One person who is joking more at Mr Modi’s expense is Rahul Gandhi, a scion of the Nehru-Gandhi family who is expected to be anointed head of the opposition Congress Party soon. Mr Gandhi, who until recently was widely regarded as a political weakling, has begun offering a steady barrage of acerbic barbs, to growing effect. In the past few months his following on Twitter has grown by two-thirds, threatening the BJP’s dominance of social media.”

[Note: The social media boost which Mr Gandhi is experiencing may prove to be particularly telling. Nearly half the registered voters in Gujarat are under 35 years of age and therefore have no practical adult experience of state government other than the BJP. If the INC can successfully reach out to these voters, it stands to make a big dent in the BJP’s share of the vote.]

One senior member of the INC ( speaking anonymously) put it as follows:

“He seems to have come a long way. He is more involved and interested in what he is doing today. Let's face it, he knows that he has to buckle up and it is high time he does so. As for the image makeover, the truth is that the timing is right for us. More than Rahul Gandhi's fortunes going up, it is about Modi's image taking a beating. None of us were as hopeful as we are today. Eight months back, none of us thought we would be in the reckoning for 2019 (parliamentary polls). We had almost given Modi a ten-year tenure. Things have clearly changed today.”

It is hardly surprising, therefore, that even though opinion polls are forecasting no more than 70 seats at best for the INC, the Gujarat election is being seen as a litmus test not only for the BJP but also for Mr Gandhi personally and, therefore, the short- to medium-term prospects of his party as a whole.

More important tests ahead?

This being said — and acknowledging that, as the home state of Mr Modi, the Gujarat election per se is unquestionably important to the INC — I tend to agree with Kritika Banerjee, writing in India Today, that a strong INC performance there is even more important in terms of the momentum it would give the party heading into an important run of state elections in 2018. Four big states — Rajasthan, Madhya Pradesh, Karnataka and Chhattisgarh — worth a total of 93 seats (out of a possible 552) Lok Sabha (ie the lower house of India’s legislature) come the general election are up for grabs, whereas Gujarat and Himachal Pradesh, which also goes to the polls next month, combined ‘only’ offer 30.

[Note: In Himachal Pradesh the INC is, in fact, the incumbent, having ousted the BJP in the 2012 election. Opinion polls forecast that the state will again change hands.

Keep in mind too that the outcome of state elections has a direct impact on the balance of power in the 250-seat upper house of India’s legislature, the Rajya Sabha, which has equal legislative powers to the lower house in all areas except budget. That the BJP government in Delhi has not had an upper house majority to date is one important reason why it has underperformed on its reform agenda relative to the expectations of many when Mr Modi first won power in 2014.]

Furthermore, as Nilanjan Mukhopadhyay of Bloomberg Quint has noted:

“…between now and the next parliamentary elections, there will be assembly polls in 13 states before or along with those for Lok Sabha. If one is to add those that will be held within six months of the parliamentary round, the total is 16.”

As the BJP shifts from being seen as the insurgent to the incumbent more or less nationwide now it is in its fourth year in power in Delhi, I can only agree with Mr Mukhopadhyay that the BJP’s tried and tested election tactics may no longer suffice, since…

“With Gujarat, [Mr] Modi is, in fact, entering a completely new cycle of elections”.

But first things first...

Despite the momentum which the INC has, few if anybody is predicting a change of government in Gujarat. But this is not the real issue. Anything less than a solid BJP majority would be a blow to Mr Modi and his party — and would be seen as a ‘win’ for Mr Gandhi and the INC. Retaining the 116 seats it won in 2012 is, in effect, the minimum requirement.

It is hardly surprising, therefore, that, again as The Economist (subscriber access only) put it:

“…Mr Modi is taking no chances. He has campaigned furiously and showered the state with handouts. If the BJP loses even a little ground, some will say its efforts backfired.”

All this being said and for all the legitimate concern within the senior ranks of the BJP, Mr Modi’s own personal appeal is not to be underestimated. Admittedly, the research underpinning a Pew Research Center poll published in September was undertaken in February/March, ie before the roll-out of the GST; but it still shows quite remarkable support for Mr Modi personally which lead author Bruce Stokes sums up as follows:

“About two-thirds of the Indian public is satisfied with the direction of the country and eight-in-ten think the economy is doing well. A similarly large proportion has a favorable view of Modi, a sentiment that is down slightly from 2015.”

The ‘Modi factor’ should continue to serve the BJP well in Gujarat in particular. Especially as, according to the same survey, Mr Gandhi actually had ground to make up following a dip in his approval rating from 63% in 2016 to 58%.

Furthermore, albeit anecdotally, my clear impression during my most recent visit to India is that, for all their unhappiness over demonetisation and the GST, Gujarat’s small traders will not turn against Mr Modi and the BJP when push comes to shove on polling day. I am encouraged in this view by an article I found by Ajaz Ashram when researching this piece, which was published in back in July shortly after the launch of the GST and which puts up a detailed argument in coming to the same conclusion.

...with a long way to go still

In sum, I expect that, despite all the justified unhappiness with the BJP government in Delhi, the party — thanks in no small part to Mr Modi’s campaigning prowess (with the notable exception of the 2015 Bihar state election!) — to do well enough in Gujarat. I also still see a BJP majority, albeit it reduced one, as the most likely outcome of the next general election. But there is much water to flow down the Ganges between now and then and it is already clear that the BJP is in for a much tougher battle in upcoming elections than we had been anticipating even as recently as six months ago.

In the light of this I stand firmly by a view I expressed to several of my clients during meetings in India this month that, as is clearly the case in Gujarat, the BJP will take no chances in the run up to the next general election and will do whatever it can fiscally to help its campaign along the way.

Alastair Newton