Gujarat election may signal voters’ support for India’s ongoing economic reform

The western Indian state of Gujarat went to the polls for the second phase of the Assembly elections on Thursday, and many observers in China are watching the outcome closely, with the results due out on Monday.

The Gujarat election may be a litmus test for Indian voters’ attitude toward Prime Minister Narendra Modi’s reform agenda. That’s an issue of deep concern to China because of its increasing economic interaction with India.

Modi’s Bharatiya Janata Party (BJP) is making serious efforts to avoid electoral losses in Gujarat, where Modi served for 13 years as chief minister before he was sworn in as prime minister in 2014. Modi’s “Make in India” campaign and his economic reforms such as the goods and services tax have to some extent been seen as a continuation of the so-called “Gujarat model of development” that Modi claimed could be replicated across the whole of India.

Modi’s reforms have drawn fierce opposition from other parties and some economists, but those most qualified to evaluate the “Gujarat model” are the people of Gujarat. Whatever the election result is, it will have a great impact on the public opinion environment for the implementation of the rest of Modi’s reform agenda.

China is witnessing a boom in outbound investment, with direct investment to India in 2016 reportedly many times higher than the year before. The outlook for India’s economic reforms is deeply related to a good number of Chinese companies doing business in India such as Xiaomi and OPPO. If the BJP wins an overwhelming victory in Gujarat, the Modi administration may take more radical approaches to economic reform. China’s companies will feel the changes no later than India’s.

However, if viewed from another angle, a loss for the BJP in Gujarat would be the biggest setback yet for the economic reforms initiated by the Modi administration. It’s possible that voters in other Indian states might be influenced by a BJP loss in Gujarat and Modi’s economic reforms might then be abandoned halfway due to a possible domino effect.

Even if the BJP wins the election but loses a chunk of its hefty majority in the state, the prospects for India’s reforms may be clouded. Growing market fears of a possible setback for the BJP in Gujarat reflect a flaw in India’s economic reforms: People doubt that the reforms can bring enough benefits to the country’s small businesses and ordinary people. The government must find a way to make the reforms gain public support.

China should take a close look at the BJP’s Gujarat campaign. Companies doing business in India should prepare for possible changes in economic policy over the long run and possible volatility in India’s financial markets next week after the results are announced.