The return of political risk
Despite all the political jitters, every ruling coalition at the centre knows it has no alternative but to pursue business friendly policies to ensure growth
Political risk is back with a bang. It will continue to affect markets, businesses and the Indian economy in the months ahead, till the general elections are out of the way. Globally, Donald Trump is political risk incarnate, with his penchant for protectionism and sabre-rattling.
The saving grace is the return of political risk comes at a time when the Indian economy is finally recovering, after the twin blows of demonetisation and the goods and services tax (GST) teething troubles. Global economic growth too is picking up.
Nevertheless, we mustn’t underestimate the impact of politics. Last Friday, for instance, Indian stock markets fell sharply when the Telugu Desam Party (TDP) quit the ruling coalition. Earlier, the results of the byelections in Uttar Pradesh and Bihar reversed whatever little boost to sentiment had been delivered by Bharatiya Janata Party (BJP) victories in the North-East. With several state elections due this year and the general elections next year, fears about political uncertainty will intermittently pop up in the months ahead.
The risk also arises from populist policies the government pursues to win re-election. Loan waivers are an obvious example. The government knows it has to defuse mounting unrest in rural India, which is why it announced that minimum support prices will be hiked to 150% of the cost of production and will also be extended to more crops.
Most analysts believe the government’s formula doesn’t really include all costs and consequently prices may not rise much. But that doesn’t make political sense. Surely, if the intention is to benefit the farmers, that implies they should get more than what they currently earn? And surely farmers are not so dumb that they will be swayed by mere rhetoric about farm prices? The point is that if the government is sincere about giving a better deal to farmers, then that will result in higher inflation, as well as a higher deficit. That in turn implies higher interest rates. In short, buying off farmers has an economic cost. There are no free lunches.
To be sure, the economy is indeed recovering. But for politics, what matters is whether most sections of society are participating in the recovery. Many farmers clearly are not. There has been plenty of anecdotal evidence of the damage inflicted on the informal economy by demonetisation. Similarly, GST has been hailed by market analysts as a measure that will increase the market share of formal sector firms. But the flip side is the share of firms in the informal sector would shrink. That has political ramifications, given the size of the informal sector.
Nor are demonetisation and GST the only fault lines. The bankruptcy law was sorely needed and it will change the face of Indian business. But there are some aspects of this law that could have a substantial effect on politics. For instance, while the big companies will find bidders, it’s likely that many of the smaller firms hauled to the bankruptcy courts find no buyers and have to be liquidated. What will happen to those who work in these firms?
Secondly, the Reserve Bank of India’s clampdown on banks ever-greening their loans, while very welcome, will in the short run increase bad debts for banks, which will have to provide fresh capital to mend the hole in their books. This could affect bank lending and consequently the economy. The government is under pressure to be seen to be doing something about the Nirav Modi scam and if it degenerates into a witch hunt, it could affect business sentiment.
Finally, the Trump risk is a sword hanging over our heads, especially since our exports are doing badly even without trade wars.
To be sure, there are bright spots too—the GDP data shows that the construction sector, a big employer for the masses, is picking up. But there is no denying that uncertainty has increased.
This is all the more so after the Gorakhpur debacle. The BJP has been able to count on its Hindutva ideology to deliver the goods when the development rhetoric fails. Bluntly put, businesses and markets care a fig for ideology as long as it provides a stable right-wing pro-business government. Hindutva, seen through this lens, ticked all the right boxes. But losing the Gorakhpur seat raises a question mark on Hindutva’s ability to deliver.
The irony is that, despite all the political jitters, at the end of the day, every ruling coalition at the centre knows it has no alternative but to pursue business friendly policies to ensure growth. That belief is what sustains the long-term India story.
Manas Chakravarty looks at trends and issues in the financial markets.
Respond to this column at firstname.lastname@example.org
Editor's Picks »
- Won’t join NDA for 2019 elections, says Chandrababu Naidu
- Reliance Power Q1 profit rises 3% to Rs237.33 crore
- TMC will sweep in all 42 Lok Sabha seats in West Bengal, says Mamata Banerjee
- Rahul Gandhi has seriously hurt image of Indian politician before world: Arun Jaitley
- HDFC Bank Q1 profit rises 18% at Rs4,601 crore
- What ABB India’s performance in June quarter says about capex growth
- Bajaj Finance does well in Q1 even as competition hots up
- Kotak Mahindra Bank: The perils of being priced to perfection
- Higher cane price crushes hopes of sugar mills
- Market optimism before 2019 general election: History may not repeat itself