23 March 2012

Dr Gareth Price

Senior Research Fellow, Asia-Pacific Programme


The outcome of five state elections in India bodes badly for its national parties, for those countries seeking to deepen their engagement with India and for those hoping that economic reform will be expedited.

What they also show, however, is the increasing sophistication of the Indian electorate and an inclination to judge parties on results. For the Indian public at large, more interested in whether they have access to health and education, the regionalisation of Indian politics may well provide a source of optimism.

The main focus was the state election in Uttar Pradesh, the heartland of the Gandhi family, where the heir apparent, Rahul Gandhi, led the campaign. Congress had hoped to be able to hold the balance of power in the state. Instead it remained firmly rooted as the fourth largest party, winning just 28 out of 403 seats, a slight increase from the 22 seats it had won in the previous election.

In part this may reflect a move towards split-ticket voting. The national parties – Congress and the opposition BJP – have performed marginally better in general elections than in state elections in recent years. But the trend towards regional parties appears significant.

Economic Slow Down

The outcome of this can be seen in two discrete events. First, in the lacklustre budget, announced on 16 March. For the most part, the budget included few changes of note: no grand schemes of populist spending in the run-up to the general election, no significant tax changes and no indications of imminent economic reform. India’s fiscal position remains worrisome, although some steps were taken to limit subsidies. But given concerns over the slow-down in India’s economic growth, the opportunity to send signals to investors, both domestic and foreign, was missed. 

One significant signal was sent to foreign investors. In January the Supreme Court ruled that the government could not tax a deal between Vodafone and Hutchison Whampoa which involved an off-shore purchase of the latter's Indian operations. The Indian government had argued that Vodafone owed US$2.2bn in capital gains taxes for its US$11bn purchase. So in the budget the government announced that it would change its tax code retrospectively to collect capital gains taxes on offshore acquisitions involving Indian assets. A range of foreign companies could be affected. A retrospective law to allow the government to tax software transactions was also introduced; that sector had flourished under a ten year tax holiday.

Foreign Policy

Second, the regionalisation of Indian politics is playing out in foreign policy. On 22 March, India took the extraordinary decision (in its own terms) to support a US-sponsored move in the UN Human Rights Council calling for an investigation into crimes carried out during the Sri Lankan civil war. The shared cultural affinity between Tamils in India and Sri Lanka has long meant that the littoral state of Tamil Nadu has had an interest in the rights of Sri Lankan Tamils. Given India's long-standing position against 'interference', this is a step-change, to say the least. 

Bangladesh, too, has seen the impact of regional parties on India's foreign policy. The West Bengal-based Trinamul Congress provides 19 MPs to the ruling coalition. In September 2011, the prime minister, Manmohan Singh, visited Dhaka in the hope of signing a land-mark deal on water-sharing. In return, Bangladesh would take steps to ease transit access to the near-landlocked states of North East India. But days before the visit, the water-sharing deal was scuppered by the chief minister of West Bengal, Mamata Bannerjee who claimed it was unfair to farmers in West Bengal. While foreign policy is the preserve of Delhi, the need to maintain the coalition (and the fact that 'water' is constitutionally a matter dealt with by states) meant that an opportunity to cement relations between India and Bangladesh went begging. 

Trend to Continue

The regionalisation of Indian politics may be no bad thing. With 1.2bn people, state-based parties are frequently closer to the needs and aspirations of their constituents. Traditional voting along caste- or ethnic lines is gradually shifting towards voting for parties that deliver on promises. And regionalisation emphasises the point that the average makes little sense in the case of India, where global software firms coincide with vast poverty. Understanding India requires an understanding of its states, and of the relationship between those states and the central government. Future coalition governments may well be 'led' by Congress or the BJP, but the first names on the list will be a host of regional parties from India’s states on whose support either of the two national parties will rely.