In a stunning upset, the Congress Party defeated the incumbent Bharatiya Janata Party (BJP) in India's national elections. The Congress Party won on a campaign that the economic reforms enacted by the BJP-led National Democratic Alliance since 1999 have not reached everyone, especially those in the villages and the poor. This leaves the Congress Party with a big challenge—will it be willing and able to continue with the economic reforms that are necessary for economic growth? And how will it balance the long-term necessity of pursuing reform with bringing wealth to those who have not yet reaped the benefits of economic growth?
Balancing the needs will indeed be extremely difficult. In the long run, economic growth will help alleviate poverty in India, but in the short run, most of the benefits of economic growth will go to the middle class rather than to the poor.
The Congress Party will be pressured to slow the pace of reforms given its campaign to spread the wealth, but it needs to stay the course on reforms to ensure that there is more wealth to spread.
Economic reforms that have led India's relatively closed and quasi-socialist economy towards market capitalism and trade have been credited with much of India's economic success over the past decade. Over the last 20 years, governments led by both the BJP and the Congress Party moved to lower trade barriers, lessen restrictions on foreign direct investment, and disinvest the government from many of its publicly owned enterprises.
The results of these reforms were apparent most recently in the annualized 10.8 percent growth in India's GDP during the first quarter of 2004, making India the fastest growing major economy in the world. Foreign direct investment has increased 30-fold over the last decade as India has increased the limit on foreign ownership of firms, decreased the red tape around foreign direct investment and created "special economic zones" that provided the necessary infrastructure to attract foreign investment.
India has become a leading hub of high-tech manufacturing and services with its low-cost, high-skilled labor force and has drawn major foreign companies to its shores. The services sector now makes up almost 50 percent of India's GDP, up from 40 percent in 1991. Education rates have also increased from 50 percent in 1991 to 65 percent in 2001.
Despite the immense progress India has made, there is still room and necessity for further reform. It still has the highest tariff rates in the region, a heavy burden of government debt (currently at 11 percent of GDP), and inefficient industry that is laden by government regulations.
India's economic potential can only be realized for all its citizens if the reforms continue, but the Congress Party faces several constraints on its ability to do so. First, its majority within its coalition will be less than the BJP's was, and many of the Congress Party's coalition partners will be from the country's socialist and communist parties. Because these coalition partners are more wary of economic reform and will hold more sway in decision-making, reforms will likely proceed much slower than their already molasses-like pace.
Also, the loss of continuity can be an issue in a country like India, where political stability is not a given. Uncertainty over who will become prime minister, whether the new government will last, and whether India will be able to pursue the economic reforms necessary may deter future foreign investment. Moreover, the Congress Party appears to have less commitment to downsizing the government than did BJP. Given that India's large fiscal deficit needs to be brought under control, it is unclear whether the pledge to reduce the government deficits will remain strong.
The Congress Party's historical stance on economic reform and its commitment to continue with it are encouraging. It was after all the Congress Party, under Rajiv Gandhi, that first initiated economic liberalization reforms in India in the 1980s. More significantly, it was the Congress Party again, led by then Finance Minister Manmohan Singh, that encouraged more sweeping reforms in 1991.
And yet clearly, the BJP was unable to ride the wave of economic growth to victory. Despite pockets of economic success, many of India's citizens, especially the rural and poor, have not seen an improvement in their lives, a situation that the Congress Party took full advantage of during its campaign. And now it must face a harsh reality—the short-term challenges that are a consequence of liberalization are now its problem to solve.
To maintain high economic growth rates and continue on the path to poverty reduction, the Congress Party will have to follow through with its campaign promise to help the rural and poor partake in the fruits of economic growth, which includes creating more private-sector jobs and providing better access to health care and education. Indeed, if it can do this and also remain committed to further reducing trade barriers and government involvement in the economy, it will have truly achieved a lasting success.
The challenge for the Congress Party is clear. While it will be pressured to slow the pace of reforms, it needs to stay the course on reform for India's long-term benefit. At the same time, it must live up to its campaign promise and also focus on improving the lives of the poor. Given these stakes, the political honeymoon for Congress and the new Prime Minister is likely to be very brief.
Sonal Shah is the associate director for economic and foreign policy and Radha Chaurushiya is an economic policy analyst at the Center for American Progress.