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Asset Management Viewpoints

The Indian Economy: A Political Conundrum?

by Nirvikar Singh

The Stifling Hand of Uncertainty on the Political Front

Uncertainty is always and everywhere a tremendous inhibitor of investment by businesses. When management teams can’t see their way forward they tend to sit on their hands and wait for the fog to clear. A good part of India’s difficulty in the last few years stems from uncertainty surrounding major policy issues, and this uncertainty intensified in the closing months of 2013 and the opening months of 2014 under the shadow of the next parliamentary elections to the Indian upper and lower houses, due to be held in April to May 2014. The uncertainty is heightened by the fact that the last state elections have made it very difficult to guess which government the political process is likely to anoint this time round. And in India, which policies will be pursued and their relative likely impact on the economy is very tightly bound up with who wins the election.

There is a body of opinion that suggests that the Bharatiya Janata Party (BJP) is likely to come back into power, carried in with the support of allied parties. That probability has in all likelihood strengthened in recent months, but the thing that makes Indian politics so very difficult to predict is that assigning probabilities to outcomes requires a detailed state by state analysis. In every state, how the BJP and the INC (the Indian National Congress Party) do depends on who can put together a sufficient alliance of minor parties—and these minor parties change from state to state, and vary in importance from state to state.

So what Indian politics throws up, above all else, is coalitions and temporary alliances. It is above all about building alliances. This means that part of the political give and take involves this or that party bargaining to get this or that candidate into a particular ministerial office. The key ministry of telecommunications was decided in this way after the last elections. So you get the minority parties enjoying power without responsibility, and the fact that India is so large and heterogeneous amplifies the problem.

Arguably, the BJP’s prime ministerial candidate, Narendra Modi, carries some baggage from the 2002 Gujarat intercommunal violence, where he was accused of initiating and condoning the violence. Despite his being cleared in 2012 of all complicity in the violence by a special investigations team appointed by the Indian Supreme Court, the issue has not gone away. It will be interesting to see what kind of success he has brokering deals with minor parties. Modi is decisive and forthright, which makes him attractive, but it remains to be seen what happens.

However, by March 2014 some of the fog should have lifted. While that will improve business sentiment, many issues remain. One of the more important of these is the question of whether the tapering initiative launched by the US Federal Reserve in December 2013 is going to adversely affect India. We saw some very substantial depreciation of the rupee when Federal Reserve chairman Ben Bernanke first started talking publicly about the imminence of tapering in May 2013.

The rupee now appears to have factored in much of this news, and at 61 to 62 rupees to the US dollar Indian exports have demonstrably increased—despite the fact that the rupee has recovered some of its value against the dollar. At 68.55 rupees to the dollar the rupee was undervalued, and debt repayments in dollars were becoming extremely difficult for many Indian businesses. However, the new governor of the Reserve Bank of India (RBI), Raghuram Rajan, who took office in September 2013, is very bright and impressive, with a great ability to deal with policymakers and to be a policymaker in his own right. We can look to more innovative policies from the RBI in future which should be a help to the Indian economy.

Debt and the Low US Dollar Interest Rate

Although India is more extended now in terms of external debt, its debt to GDP ratio is still relatively modest. From 1991 to 2012 India’s debt to GDP ratio averaged 74.6%, with an all time high of 84.3% in December 2003 and a record low of 67.6% in December 2012, with a forecast of 67.53% for 2013. However, corporate indebtedness is a problem. The extremely low borrowing rates against US dollar loans have led many companies to take on very significant dollar-denominated debts, and we are now in a negative circle. This is where slower growth and uncertainty exacerbate the bad loans problem and make it very difficult for businesses to extricate themselves from a debt spiral that can only be made worse as US interest rates move up off their historic lows—which, with the ending of tapering, they are bound to do.

Structurally, reform in the Indian financial sector has lagged the economy generally. The problem is not just that there has not been enough liquidity or enough funding of companies by banks. There are also issues over who the money that is lent goes to and how well banks monitor loans and manage their loan books once the money is lent. All the processes are very inefficient and there is some anecdotal evidence to show that public sector banks are unduly influenced by politicians. These kinds of issues—that is, better supervisory control of the banking sector—are all things that the new governor of the RBI is tackling. Rajan is all about modernizing and expanding the capacity of the banking system, and this should improve the quality and quantity of financial intermediation in India.

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Further reading


  • Bhagwati, Jagdish, and Arvind Panagariya. Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries. New York: PublicAffairs, 2013.
  • Corbridge, Stuart, John Harriss, and Craig Jeffrey. India Today: Economy, Politics and Society. Cambridge, UK: Polity Press, 2013.
  • Drèze, Jean, and Amartya Sen. An Uncertain Glory: India and its Contradictions. Princeton, NJ: Princeton University Press, 2013.
  • Kale, Sunila S. Electrifying India: Regional Political Economies of Development. Redwood City, CA: Stanford University Press, 2014.
  • Kapur, Devesh. Diaspora, Development, and Democracy: The Domestic Impact of International Migration from India. Princeton, NJ: Princeton University Press, 2010.


  • Khilnani, Sunil, Rajiv Kumar, Pratap Bhanu Mehta, Prakash Menon, Nandan Nilekani, Srinath Raghavan, Shyam Saran, and Siddharth Varadarajan. “NonAlignment 2.0: A foreign and strategic policy for India in the twenty first century.” Centre for Policy Research, New Delhi, India, January 30, 2012. Online:


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