In the context of the looming political uncertainty of a hung Parliament, this is the most decisive verdict that could have been delivered; all the more so from the perspective of economic management of the country at what is arguably the most difficult period in recent economic history.
Haseeb A. Drabu, Chairman, Jammu and Kashmir Bank Ltd.
The most important feature of the election is that a stable government will be in power for the next five years. In terms of broad trends, one of the things that this election has shown is the gravitation towards a two-coalition political system.
Of the two main coalitions, the Congress party-led United Progressive Alliance (UPA) has a far more decisive, clearer and well-stated operational economic policy map in place. The Bharatiya Janata Party-led National Democratic Alliance (NDA) lacks it and that may have been the key differentiator between the two.
Indeed, the recent ruralization of economic policy, particularly in public expenditure and employment, has had a positive impact. Also, the UPA has, and is seen to have, a far superior team of economic managers with credibility and proven track record. This, in these difficult times, is going to be major advantage in governance.
What will this translate into? The short-term impact will be hugely positive. The outlook on India will change for the good. Business confidence will get a booster and investors will be reassured.
In the very short term, the equity markets will react favourably. One doesn’t have to be an expert to predict that the markets will open with a huge positive gap on Monday. The markets, which have been grappling with a ragtag coalition, will now react to political stability even more than to the UPA coming back to power. The debt market will see a recalibration of the yields in anticipation of the softer interest rate regime continuing. The foreign exchange market will also see a marginal strengthening of the rupee.
But once the euphoria emanating from stability and the setback to the Left parties is over, the more enduring aspects of economic policy will come into play.
The next big event will, of course, be the national budget. The public expenditure policy implicit in the budget will be the one to watch out for. There is bound to be major policy action on this front. What is most likely to be presented will be a budget in the spirit of the 1980s—a high fiscal deficit and high expenditure budget. But it will have the flesh and bones of a 1990s budget in form of some second-generation stabilization reforms. There will also be some privatization as well as budget reforms to increase the effectiveness of public expenditure.
The fiscal policy laid out in the budget will, in turn, determine what role monetary policy would have to play. The effort will be to complement the expansionary fiscal policy with an accommodating but not an expansionary monetary policy. This will ensure that the softer bias that we have seen so far in interest rates, will continue. This is, however, easier said than done. In fact, how to run an expansionary fiscal policy even as monetary policy is made to act contractionary, will have to be seen. Too much reliance on debt will have a bearing on the market rates of interest. However, the government will have some flexibility as inflation is low and demand is still constrained.
Market players are already celebrating the exit of Left parties from the coalition. This might not necessarily mean that the new government will go for a big bang liberalization and structural reform. On the contrary, we will see more of gradualism and stabilization efforts in the next two years.
The reason for this is not an unwillingness to go for a major overhaul but the fact that the next year or so is not appropriate for undertaking structural reforms in view of the global macroeconomic instability. It needs to be recognized that one of the features that has saved Indian economy from the fallout of the global meltdown in financial markets is the slow process of liberalization. What this really means is that the simultaneous attempts towards structural reforms and economic liberalization will not lead to macro stability or to the restoration of sustainable growth.
What will is the focus on stabilization of a kind that will reignite growth in the economy. In line with the existing approach, case-by-case approach liberalization will be ideal. By and large, this has been the style of the UPA government in the past five years and indeed in the 1990s.
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