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What elections can bring to indian economy

, March 11, 2014, 1 Comments

Elections & Indian Economy-MarketExpressThe Indian business community has great hopes on the outcome of the general elections. They are expecting the formation of a Modi-led government at the centre which they expect will lead to a revival of growth in the Indian economy. Investors in the stock market also expect a rally in the markets after a BJP government assumes charge. Let us try to find out how far these expectations will be realized and how the fortunes of the Indian economy will change after the elections. We start with a review of the performance of the Indian economy during the last phase of the UPA rule.

The first two years of UPA II rule saw good performance of the economy. There was, however, a deterioration in performance during the latter part of UPA II rule. During this phase there was a setback to the global economy and global factors had made a contribution to decline in growth rates of the Indian economy during the last few years. Domestic factors were also a contributing factor to this setback in economic performance.

Domestic factors started impacting the performance of the Indian economy after the release of the CAG report on 2G. This report had made strong allegations against the UPA government which several ministers of the government consider to have been grossly exaggerated and far removed from reality. The origin of what is today referred to as policy paralysis can be traced primarily to time of release of the 2G report. Since the release of this report a sort of fear psychosis gripped the bureaucracy and the council of ministers.

The 2G scam was followed by the coal scam. Accusations were leveled against the Prime Minister, as well, and we saw the withdrawal of Dr Manmohan Singh into a shell, and he started to refrain from making any public statements and gradually lost all authority over his own government. The policy paralysis operated at the level of the PM, other ministers in the government, and also embraced the bureaucracy. Among ministers the case of environment minister, Jayanti Natarajan, was a classic example of a minister who, out of fear, refused to clear files sanctioning environment projects which led to a large number of infrastructure projects not receiving environment clearance until the minister was removed from the post she held.

The bureaucracy was also entangled in the process of policy paralysis. One of the factors that induced policy paralysis in the bureaucracy was the RTI Act. Many in the bureaucracy view this piece of legislation with horror and it induces them to follow a principle of doing nothing and shirking responsibility. In bureaucracy it is an accepted theory that as long as you do nothing you are safe and no one can blame you. It is only if you take a particular decision to follow a particular course of action that you can get into trouble. So, many in bureaucracy, follow the golden rule of holding back decisions, sitting on files and so on. Today it is RTI Act that many bureaucrats are afraid of. With the coming of Jan Lokpal and other anti corruption legislation the policy paralysis in bureaucracy is all set to get worse.

It is true that the RTI Act, the scams that affected the UPA government, judicial activism and the hostile attitude of opposition parties towards the government inside and outside parliament actually induced a policy paralysis in the functioning of the government, however much the government may try to deny occurrence of this phenomenon.

What made matters worse was the paralysis in the functioning of the parliament. The term of the fifteenth Lok Sabha has ended with a heavy backlog of pending legislation. If the opposition parties had allowed the parliament to function many of these legislation which have lapsed would have become law and the nation would have moved forward. Several legislation were passed at the fag end of the term of the Lok Sabha; but the country had a price to pay even for such delay.

Every form of delay in decision making proves costly to the nation whether it occurs due to government paralysis, bureaucratic paralysis or paralysis of parliament. The government, the opposition parties and the bureaucracy are all equally to blame for such policy paralysis which caused a decline in the growth rate of the Indian economy. A decline in growth rate of the economy means more unemployment for the labour force, more poverty for the vulnerable sections of society and also less profits for the business community and the corporate sector. It also means less tax revenue, less public and private investment and lower future growth prospects.

What change can the elections bring. Opinion polls indicate that the UPA will not return to power. The remaining alternatives are a NDA government or a Third Front government supported by Congress party from outside. An NDA government is expected to be business friendly; but it can succeed only if it is able to overcome the forces that caused policy paralysis during the term of UPA II.  It is not true that the economic policies of the UPA government were bad. The economic policy of BJP is not significantly different from that of the Congress party.

The UPA government was not allowed to function due to a multitude of factors. The NDA is not going to bring any new set of economic policies to the table that will transform the nation. It all depends on whether the NDA is able to implement its policies and overcome the ghost of policy paralysis that has gripped the nation. Many people expect Modi to play the trick. But being authoritarian, less accommodative to dissent and less sympathetic to minorities, will he be able to succeed where UPA failed?

If a Third Front government is formed there could be changes in economic policies at the centre. BJP and Congress follow the same set of economic policies. But the policies of the Third Front will be left oriented and different. Their policies will be more populist. They will object to increase in diesel and gas prices. They will put less emphasis on fiscal deficit. To them economic reforms will be a dirty word. Congress who support them from outside may not agree with all that they do. But their support is going to be of an unconditional nature.

The stock market is expected to go up in the event of a Modi – victory. It could also crash in case there is a hung parliament. If NDA doesn’t get a majority on its own it will have to go for new allies. In this eventuality it will have to be seen whether the expanded NDA which forms a government will remain stable or not. A fragile coalition may not lead to a sustained rally which could be cut short in its tracks.

On the other hand a Third Front government with outside support of Congress will not be an attractive proposition for the stock markets. In this eventuality there may be no rally and the best that can be expected is that a crash is averted.

It will be prudent not to expect too much from the elections. At best there could be a hesitant rally. A setback cannot also be ruled out. In reality the elections may ultimately turn out to be a non-event as far as the stock markets are concerned.






  • unless India gets a majority government in 2014 and a party with vision for youth, the policy paralysis would continue like this..!

    Thanks,
    Vivekam Financial Services