In the next few months, India and Indonesia − two of the world’s largest democracies − are scheduled to hold elections. In India, the total electorate is estimated at 814 million, while Indonesia has around 190 million voters. Both economies are moving in the right direction, but the outcome of the elections will be critical for their futures since they will need to do a lot more to ensure their recovery remains on track. The candidates leading the polls, Narendra Modi in India and Joko Widodo in Indonesia, have been positively embraced by markets thanks to their track records in their current functions. Still, they will have to achieve much more than they have in their own regions to maintain their success at national level. In 2014, we see GDP growth picking up from 4.5% to 5% in India and slightly declining in Indonesia from 5.8% to 5.5%.
Modi a stronger candidate than Widodo
India will head to the polls to elect members of Parliament (the Lok Sabha) in a nine-step process extending from 7 April to 12 May. The results will be announced on 16 May. The Prime Minister will then be appointed by the Lok Sabha by a majority of 272/542 seats. Coalitions have become an important part of India’s politics and regional parties are now playing a large role, which has fragmented the political landscape. If the polls are correct, the leading BJP party should have a very strong showing in the elections, but we expect a coalition will still be required. The last time India had a single-party government majority was in 1984. Mr. Modi the candidate from BJP and the Chief Minister of Gujarat, is mainly supported by the Indian young population encouraged by his promises to deliver job opportunities through stronger economic growth. Business people are in favour, because of his strong leadership, his desire to fight bureaucracy and the promise to break with the traditional way of doing politics.
In Indonesia, parliamentary elections will take place on 9 April and presidential elections on 9 July. Candidates for parliament are competing for 560 seats. Only political parties that win 20% of the seats can nominate the candidates for President. Mr. Widodo has been rising in popularity since becoming the mayor of Solo, a small city in Central Java in 2006. He became Governor of Jakarta in 2012 and his ratings have been increasing since then. His success is partly due to his engagement with local communities with focus on problem solving and he is a skilful communicator. Some suggest that the popularity of Mr. Widodo is due to the lack of alternatives in Indonesia, given the claims of corruption surrounding many politicians. This could prove dangerous in a country that still needs to pass many reforms through parliament and where consensus-building remains important.
We expect that in the coming weeks more details will be communicated regarding the economic agendas of both candidates.
The economy at the forefront of elections
Following the mini-crisis in the summer of 2013, India and Indonesia have shown some improvement in their economic data while confidence has strengthened. We think both economies have bottomed and that the rapid adjustment and strong external demand will continue to play an important role in their recovery.
Indeed, India’s economy is slowly reducing its imbalances, whereby export-led sectors are the main drivers. There has been a sustained improvement in the trade balance, but this is also the result of slower import growth due to the gold import ban and weaker domestic demand. The election process could give a boost to the economy in the coming months given the increase in public spending over a relatively long election period. The fall in headline CPI is encouraging, but the pace of decline should increase if the central bank opts to use inflation targeting as its monetary policy framework. However, we expect another rate hike in the second half of year, as the central bank will likely want to further contain inflation expectations resulting from the wage hikes in rural areas. The challenges are daunting for the government given that a lot remains to be done on the structural front. Particularly important are the need to overhaul the tax system and infrastructure improvements, albeit with the support of private participation.
Meanwhile, Indonesia’s economy has been improving on the back of a number of measures recently taken to diminish its imbalances, including the reduction of oil subsidies and interest rate hikes. Although the current account deficit has come down, this could be temporary given the recently adopted mineral ore ban. Inflation has been falling and it should move towards the central bank’s target (4.5 +/- 1%). Although investor sentiment has improved significantly regarding Indonesia, its external outlook remains quite vulnerable given its high reliance on foreign funding and its strong export dependence on China.
The major question for the two leading candidates is whether they can replicate their success at national level. So far, markets have been quite positive about the two front-runners and this will be an important boost for credibility if they win. But consensus building will remain important to pass the needed reforms. In India, we expect investment in infrastructure to be the main spearhead of Mr. Modi’s programme. Indeed, the development model of the state of Gujarat, where Mr. Modi is Chief Minister, shows a heavy emphasis on infrastructure, primarily via public-private ownerships and lower subsidies, but also higher budgetary allocations towards social spending. Gujarat’s social spending is 69.9% while the national average is 66.4%. There has been progress in implementing favourable industrial policies, including state acquisition of land for transfer of industrial users.
In Indonesia, Mr. Widodo has become popular in his current position as governor of Jakarta thanks to his focus on pro-poor polices, including healthcare and education. We expect these to remain his priorities if he wins. Corruption claims have sidelined traditional politicians and the fact that he is an outsider to politics has made him very popular. We expect that Mr. Widodo will provide continuity to the measures to limit imports, such as the ban on mineral ores. Parties on both sides of the spectrum seem to be supportive of this law as a means of adding value to commodity production.