BREAKINGVIEWS - India braces for last year of political stability

Wed Jan 2, 2013 3:38pm IST

People stand in front of the Indian parliament building on the opening day of the winter session in New Delhi November 22, 2012. REUTERS/B Mathur/Files

People stand in front of the Indian parliament building on the opening day of the winter session in New Delhi November 22, 2012.

Credit: Reuters/B Mathur/Files

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Andy Mukherjee

SINGAPORE (Reuters Breakingviews) - India's politics is about to take a sinister turn. The coming year may be the last one of relative stability for the country.

After the 2014 general elections, neither of the two mainstream national parties will have the numbers to form a government, paving the way for a wholly opportunistic "third front" to take over and pursue populist policies that will wreck an already fragile exchequer. And since containing the budget deficit holds the key to reviving investments in India, the business cycle recovery that will start in 2013 won't endure.

This is not a risk investors have faced in the last 13 years. Since 1999, one of the two main national parties - the centre-right Bharatiya Janata Party or the centre-left Congress - has been at the helm in New Delhi. The policies and performance of BJP- and Congress-led coalition governments may have been less than stellar, but the politics has been stable: All governments since 1999 have completed their full terms. Manmohan Singh, the current prime minister, is already the third-longest-serving Indian leader after Jawaharlal Nehru and Indira Gandhi. But this era of stability will now end.

The rise of smaller parties in national politics is a two-decade-old trend, as the slide in the combined number of parliamentary seats won by the Congress and the BJP shows. The 2009 polls were an exception. In the next elections, fragmentation will resume as the Congress loses seats, and the BJP fails to capture them.

The Congress is beset by a string of corruption scandals. On its watch, GDP growth has slowed and inflation has been high. Rahul Gandhi, the party's likely prime ministerial candidate, has no track record in government. Meanwhile, the BJP is facing its own midlife crisis. The party's president is being investigated for shady business dealings, senior leaders are fighting openly, and there is no agreement on who should be prime minister. The strongest candidate the BJP has for the job is Narendra Modi. The business-friendly chief minister of Gujarat is an effective administrator. But his alleged involvement in anti-Muslim pogroms 10 years ago makes him controversial and divisive. Besides, Modi's authoritarian streak may render him unacceptable to the BJP's existing allies.

The disarray in the two national parties presents an opportunity for a motley crew of regional parties. At some time before or after the polls, they will probably forge an alliance of convenience with the communists, who are willing to back a non-Congress, non-BJP formation, provided the parties can agree on a left-wing agenda. Then there is the more vexing question of leadership. There are several contenders, but the third front will most likely be led by Mulayam Singh Yadav, whose son rules as chief minister of Uttar Pradesh, India's most populous state.

Yadav currently plays a key role in keeping the Congress-led minority government in power in New Delhi. Political analysts are assuming that he will be a kingmaker if the next election returns a hung parliament, as all national polls since 1991 have. But if both the Congress and the BJP flounder, Yadav may as well be king himself. In that event, the Congress will have no choice except to tolerate a third-front government in order to block the BJP from returning to power. That is what happened in 1996. A fractured mandate led to two unremarkable non-Congress, non-BJP governments, which together lasted for 22 months.

There is little incentive for such unsteady governments to push for economic reforms. Regional politicians who have made their careers promising free power to farmers and subsidised rice to the poor will have no commitment to reducing subsidies. Once they are in charge, they may even use a new system of direct cash transfers to recklessly expand the welfare state.

Economists are predicting that 2013 will see a revival in India's GDP growth, which slumped to a three-year low of 5.3 percent in the third quarter of this year. Investors are optimistic about policy changes, especially a long-pending overhaul of direct and indirect taxes. But the window for economic reforms is closing fast. By the end of 2013, the risk of unstable politics will come to the fore.

CONTEXT NEWS

- Prime Minister Manmohan Singh will complete its five-year term in 2014. The Congress Party-led coalition government, battling allegations of corruption and mismanagement, is increasingly reliant on the support of small, regional parties to stay in power and push through policies such as a recent plan to allow Wal-Mart and other foreign retailers to own and operate stores in India.

(Editing by Peter Thal Larsen and Katrina Hamlin)

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