Bihar Election Outcome and Muted Implications for East Asian Investors

Dr. Amitendu Palit's picture

Indian Prime Minister Narendra Modi’s party, the Bharatiya Janata Party (BJP), was defeated decisively in the recent elections in Bihar, one of the India’s largest states. Many commentators felt the election result was a sign of the increasing popular discontent with Modi and his policies. They also felt the result might mark the beginning of consolidation of political opposition against Modi. The Prime Minister already has been facing problems in passing major economic legislations like the Goods and Services Tax (GST) Bill in the Parliament due to disruptive tactics adopted by opposition parties, particularly the Congress Party. Fears of the Bihar election result making the opposition more aggressive and creating greater hurdles for Modi and his economic reforms adversely impacted the stock market, with stock market indices dropping sharply the day after the announcement of the election result, reflecting investor concerns. Fears, however, might be exaggerated. The global credit rating agency Fitch opined the Bihar results would not in any way affect perspectives of long-term investors looking at India. It also asserted the results would not affect Modi’s economic agenda. Indeed, the government sought to assuage concerns by further liberalizing inward FDI policies in construction, banking, defense, media & broadcasting, and plantation crops. This should further encourage investors from East Asia including China which have shown keen interest in several ‘Make in India’ industries like railways, renewable energy, real estate, and telecommunications. India’s macroeconomic fundamentals also remain strong given its large market and appeal as a location for labor-intensive assembly actives – a particular lure for Chinese investors. While the Bihar election result might complicate domestic politics, it is unlikely to affect the government’s efforts to improve business conditions and attract more investment. Most of these decisions can be taken by the executive and do not require approval of the Parliament.