The time is ripe for change in India. The recent victory by the alliance led by the Bharatiya Janata party (BJP) in India's national elections suggests a period of stability and a new direction for the country. Such a period also raises the very real possibility of new and exciting opportunities for those wishing to enter one of the largest markets in the world. If general stability can be sustained over the next few years, India may finally be able to implement key economic reforms that have been on hold for some time. India may also make serious progress in improving relations with its neighbors, specifically Pakistan and China, although Pakistan now clearly presents a major challenge.

Both outcomes-now less in the realm of wishful thinking than before the elections-would substantially improve the investment climate in India and perhaps set the stage for a sea-change in India's status in the region well into the next century. On the other hand, if the BJP victory proves ephemeral or if its leader, Atal Behari Vajpayee, becomes disabled or otherwise is unable to hold together his new coalition, India could be in store for even rougher waters.

The Elections

India is the largest democracy in the world, with over 650 million voters. After five weeks of voting, the official results of the general elections-the third in three years-are in. The BJP-led National Democratic Alliance (NDA) of 25 parties took over 290 seats in the 543-seat Lower House of Parliament. The Congress party led by Sonia Gandhi got only 112 seats, with 20 of its own coalition partners. Thus, the NDA has a clear majority in Parliament. Vajpayee is the first incumbent Indian Prime Minister to be returned to office in 27 years. Widely seen as a moderate within his conservative, Hindu-based party, Vajpayee is its biggest asset and at the peak of his popularity. By contrast, Italian-born Sonia Gandhi, widow of Rajiv Gandhi (assassinated in 1991), was her party's biggest liability; her political future is now in question. The key result of the elections, however, is not the new supremacy of the BJP or a permanent eclipse of Congress; rather, it is the surge in importance of small, regional parties. Aside from the Indian victory over Pakistani-based militants in Kargil, Kashmir this summer, and the unease with Sonia Gandhi's origins, no other national issue was featured in the campaign. Without a unifying issue, some doubts exist about the BJP's ability to manage such a diverse coalition in Parliament, which may mean that some parties might bolt.

Political Outlook

On the other hand, the price to be paid by any one of the smaller parties for wrecking the Alliance will be high. After so many elections, and economic stagnation, the Indian people are weary of turnover. Stability for its own sake was high on the list of motivations behind the vote. Meanwhile, the current coalition is stronger than the last, with only two parties really in a position to threaten the parliamentary majority. These parties, especially the Telegu Desam party (TDP) from Andhra Pradesh, are firmly behind the coalition. But the BJP will have to deliver. Real efforts at reform will be popular if results are evident. For example, in the Punjab, a party that promised free electricity was rejected as reckless. While this is a good sign for the NDA, managing consensus within the NDA coalition on issues that matter to specific localities will continue to be difficult. Many feel the real key to maintaining the consensus will be a strong and growing economy.

The Economy

The Bombay stock market rejoiced at the election results, jumping over 5% to an all-time high the day after the official results were announced. Moody's upgraded India's credit rating and observers cheered. Indian exports continue to grow, foreign reserves are safely at about $33 billion and inflation is at its lowest point in 17 years. The Asian Development Bank recently predicted a growth rate next year of 7%, which will make India the fastest growing economy in Asia. This is worth watching and may mean that now is the time to translate India market entry plans into action.

Vajpayee has said he will proceed vigorously with economic reform, resuming the program of liberalization begun under former Congress party governments and long delayed by political instability. This includes finally opening up the insurance market to foreign companies, a major step. Also under consideration are banking deregulation, reduction of subsidies to lower the deficit, and privatization of large industries. These initiatives will be difficult given the NDA's heterogeneity, but they are do-able

Combined with a region-wide recovery from the Asian crisis, these reforms could make a major difference in India, which still has some of the worst poverty in the world. With its population of 1 billion rapidly multiplying (especially in urban areas), poverty will continue to be a big problem as India becomes the most populous country in the world sometime around 2020.

The other main source of growing pains will be in the energy sector. India's energy consumption is expected to more than double by 2020. Already the country imports about 60% of its oil while use of its mainstay, coal, is expected to decline by 10% by 2010. (Coal currently accounts for 60% of India's energy, while natural gas represents only about 8%.) Thus, higher import costs for oil and gas combined with high growth rates could lead to heavy strains on power supply and more frequent shortages. The upshot of strong demand will be significant business opportunities in the power generation and power management sectors.

Challenges Ahead

India's new government faces a tall order. The NDA coalition may be stronger than the last few, and popular opinion may be desperate for stability; but expectations are high and the BJP's coalition partners are already overconfident. Although the BJP has drawn significant numbers of the middle class into its ranks and has the support of important economic interests, largely in north-central and northwest India, many of the regional parties, with strong backing of the lower castes and non-Hindus, will insist on an equal voice. Without much economic or cultural clout, the lower castes consider their representation in Parliament an issue of life or death. Satisfying them while keeping their interests balanced at the national level will be a huge challenge for the new government.

The other major task for the government is to move ahead with improving relations with Pakistan and resuming an active, positive global presence, defined principally through improved relations with China and the United States. The government already has gone to considerable efforts to repair the diplomatic damage done after the May 1998 nuclear tests. India is eager to resume the Lahore dialogue with Pakistan, in spite of the "shock" of the Kargil incursion, and the current situation with a military government now in control in Pakistan. The ball, admittedly, is in Pakistan's court; and the Pakistani government, unlike India's, is not remotely stable at the moment. Thus, in spite of any goodwill on the Indian side and a stable government to back it up, the Kashmir issue could continue to roil both sides during the next year. It will further strain levels of defense expenditure in each country. In establishing an entire new corps in the north and flirting with nuclear weapons (even at the tactical level), the Indian government will be under increasing pressure to settle the Kashmir issue or take it to its logical, military conclusion.

On balance, the future for India looks promising. Some risks remain, but the payoffs could be enormous if the current optimism translates into positive actions and results. Now may be the time to weigh options and initiate plans to move forward. India has proven to be a challenge in the past and will remain so for the company who attempts entry without the proper preparation. But thorough due diligence efforts and the informed decisions based on actionable intelligence can pave the way for successful entry into the vast India market.

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