The prospect of a win for the Narendra Modi-led Bharatiya Janata Party (BJP) in the just-concluded general elections appears to have triggered a wave of exuberance among investors. The Sensex gained 3.75% to end at its highest closing level ever on Monday. At 39,352.67, this stock index ended 1,421.9 points up, recording its biggest one-day jump in a decade. Some of the gains may have been on account of snap purchases by traders desperate to cover short bets placed earlier, but it’s safe to assume that this represents the hope of policy continuity in New Delhi under the next government, widely expected to be led by Prime Minister Narendra Modi again, now that exit polls have indicated as much. Now, sample polling is an inexact science, and such polls often do go wrong, but if our stock market bulls need a reality check of sorts, it’s on the state of the economy.
A stable government with a clear agenda is good for economic growth. But this alone is unlikely to be enough to get India’s economy back to the pace of growth experienced before demonetization. An adverse economic environment, both domestically and overseas, poses significant headwinds that make it hard to accelerate. Take gross domestic product (GDP). Notwithstanding concerns over the reliability of the calculation, India’s GDP growth slowed to 6.6% in the last quarter of 2018, the lowest rate in more than a year. Industrial output has been extremely weak for months and businesses aren’t reviving expansion plans despite the central bank reducing borrowing costs. Even consumption, which has been the mainstay of the economy with about 60% contribution to GDP, is faltering, as figures from various sectors have borne out. Though not alarming yet, the situation demands close monitoring. A top economic adviser to the Prime Minister recently cautioned India against slipping into a “Middle Income Trap", suggesting that corrective steps need to be taken. Across the shores, an intensifying trade battle between the US and China is making things worse. Indeed, India is a relatively small trade player, but US President Donald Trump has trained his guns on India as well, accusing the country of levying far higher import tariffs than America does on Indian products. The US recently ended benefits that India enjoyed under a preferential trade programme. New Delhi has been deferring retaliatory action, perhaps realizing that an escalation may hurt it more. Besides, a shift towards protectionism the world over is expected to dampen global demand, reducing our export opportunities.
The next government, whichever coalition wins power, will have its hands full trying to revive growth. The crisis with India’s non-banking financial companies is still unfolding and could put the financial system through more pain. Jobs remain worryingly scarce. And the farm sector needs attention. If the BJP wins, it may be tempted to believe that the latter two are exaggerated problems. They’re not. Distress, be it among job seekers or farmers, is evident in too many indicators to be brushed aside as a figment of opposition hostility. The troubles are real, and could multiply if left unattended. As economist John Maynard Keynes said, the “animal spirits" of confidence and hope play a positive role in an economy. These are largely missing. If the enthusiasm seen on Dalal Street is to make its way to various sectors of the real economy, much work still needs to be done by those who govern India.