17 Apr 14 Indian Elections_Will it have any impact on outsourcing

For many of us in India, Election 2014 appears qualitatively different from previous elections. Of course, the noise levels are higher and much more money is being spent to generate the noise, but there are several fundamental changes. For many of us in India, Election 2014 appears qualitatively different from previous elections. Of course, the noise levels are higher and much more money is being spent to generate the noise, but there are several fundamental changes.

First, this election has morphed into a Presidential style contest, shifting focus from parties to leaders. The last time we saw something similar was in the era of Indira Gandhi. Second, the demographic bulge has dramatically altered the voter profile, with an estimated 20% comprising first time voters. The issues of the young are more around jobs and opportunities – and less about caste and religion. Third, the media (including social media) is much, much more influential than it ever was. So corruption cases, image and clever PR are more significant.

The opposition BJP and their candidate Mr. Modi have played these trends very smartly, and ten years of Congress incumbency and corruption have helped no end. Opinion polls and expert opinions seem to converge on a BJP win (notwithstanding reservations voiced by many, including the Economist and the Guardian).

But will anything change?

This is where opinions are mixed – from the “India is too complex, large and elephantine – so dramatic change is not likely”, to “A decisive leader and governance-cum-growth agenda will revive the animal spirits of the economy”.

My personal view is somewhere in between. Mr. Modi and the BJP will have to manage divergent local politicians and state governments, a media that can turn hostile in a jiffy, a highly litigious population and a complex and inefficient bureaucracy. On the flip side, even as this limits the positive impact of more decisive and market-friendly leadership, it will also limit the likelihood of blatantly communal actions.

Looking at things from the narrow prism of the outsourcing industry, and assuming for the moment that Mr. Modi/BJP win enough seats to form the government, will it have any impact? If so, what?

In the short run, business sentiment is likely to improve – and this is already visible in equity markets. While the equity investor and most businessmen will be happy, the flip side is that the Rupee may strengthen (already happening) – thereby hurting the competitiveness of exporters, including IT and business process outsourcing companies. Given the very high wage inflation in India (10+% pa), margins will come under immense pressure if the Rupee appreciates.

In the longer term, there are some positives, assuming that certain items in the manifesto are actually implemented. The first is a change in investment sentiment, especially if some of the retrograde tax policies are eased and the Tax departments become easier to deal with. Global corporations might shed some of their reluctance to invest in India, including in setting up offshore centres.

The other area that will impact outsourcing is related to promises to improve the education system in India. Not only will this improve availability of skilled labour, it will reduce wage inflation over the longer term. Finally, there is the proposal by the BJP to make technology an integral part of a drive to improve governance. If this actually happens, there will be a huge spurt in government spending on IT and e-governance, which will help both Indian and multinational technology providers.

However, all this is speculative, as Indian elections have a tendency to spring surprises. Moreover, promises made are often not kept. Along with more than a billion Indians, my only wish is that the next government is better than the last.