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Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved

Saturday, December 01, 2018

Indian elections: An Economic Perspective

by Century Financial in Off The Wall

Indian elections: An Economic Perspective

“At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom.”

Those were the words from the famous speech “Tryst with Destiny” that was made on the eve of Indian independence. Indeed, India has marched forward and made great strides as it looks to recapture its past glory through advancements in science and technology. And the most important aspect of India over the past 71 years since its independence is the democratic character of the country where equality, liberty, and justice has been guaranteed under the constitution. It is worth noting that a long list of commentators predicted the demise of Indian democracy. In 1967, Neville Max wrote in Times of London that “the great experiment of developing India within a democratic framework has failed.” So how did Indian democracy survive? Constitution of India was the primary factor which helped ensured free and fair elections at regular intervals and this ensured political representation to wide swathes of people.

How did Indian elections influence its economy?

The impact of the political process on the economy might not be obvious, but politicians are the ones who drive the country forward. In the beginning, the elections produced governments who followed ‘mixed economy model’ which was a mix of capitalism and socialism. Later on, country’s ruling class turned further towards the left in the seventies which then became right wing and this finally culminated with the launch of globalization and privatization of the economy in 1991. 

The importance of 2019 elections

India has two major political coalitions, National Democratic Alliance (NDA) headed by Right wing BJP and United Progressive Alliance (UPA) led by the pro-left Indian National Congress. In 2019, general elections will be conducted for 543 members of Lok Sabha to elect the next government during April or May.

The impact of the 2019 elections will be felt in the $ 2.5 trillion Indian economy in many ways.  The most important question is about economic priorities and how to manage the government finances to the satisfaction of the country. The ruling National Democratic Alliance is considered to be more fiscally prudent as it has kept a lid on government spending, especially revenue expenditure. For example, Minimum Support Price (MSP) of crops was not raised significantly during the current tenure of the government and allocation for the National Rural Employment Guarantee Act (NREGA) was reduced. However, the fallout of this policy is soaring rural discontent in large parts of India, and particular farmers feel they have been left out of the country’s economic progress. In fact, latest data suggests that price deflator for agriculture has turned negative for the first time since June, 2017 and this indicates significant level of heartache in rural areas. The discontent has manifested in the form of farmer protests in New Delhi which is India’s national capital and Mumbai, the commercial capital of India. The elections to the provinces, conducted in the aftermath of these protests resulted in new governments that have promised immediate farm loan waiver.

This in many ways represents the fundamental contradictions of India. The number of farmer households in India is 159.6 million, and an estimated 61.5 percentage of the 1300 million people are rural as well as dependent on agriculture, according to the 2011 Agricultural Census of India. At the same time, Agriculture accounts for only 18 percent of the GDP of India.

How to migrate the excess manpower from agriculture to other sectors of the economy like services and manufacturing forms the biggest socio-political issue of the country. And the vote will go to that political alliance which is deemed capable of solving this existential issue.

How can financial markets react?

Markets detest uncertainty; they favor continuity and stability. If NDA coalition gets the majority on its own, there is a reasonable probability of strong rally in Indian indices. On the other hand, if the ruling party fails to get a majority or the election results in a hung parliament, there could be a big drop in equity markets. Nevertheless, it should be remembered that elections are just one of the variables impacting market direction. In the long term, investors are more worried about fundamentals like valuation, corporate profits, and macroeconomic strength. For example, after the fall of NDA Government in 2004, markets initially fell but recovered sharply later on.  India is a secular growth story, and past experience suggests that it would be prudent to buy the dips.

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