INDIA ELECTIONS 2009-FLIGHT TO STABILITY-VRK100-17052009

            

From 'Flight to Safety' to 'Flight to Stability'

Rama Krishna Vadlamudi

MUMBAI

May 17th, 2009

Nandan Nilekani described the Indian mandate as a ‘Flight to Stability’ after the incumbent Indian coalition government has won nearly a comfortable majority in the Elections 2009 results of which were announced on May 16, 2009. 

 

It is hoped that the country will get a stable government for the next five years. This has brought lot optimism from the economy’s point of view.

 

The road to ‘Flight to Stability’ was, of course, a challenging one. Only as recently as September/October2008, India like the rest of the world had experienced a period of intense implosion following the global financial meltdown leading the world to an abyss. 

 

Close on the heels of the crisis, Indian financial markets have gone through a period of ‘flight to safety’ whereby market players have embraced the so-called safe investments by paring down their risky portfolios. Now, the latest mantra of stability seems to be the panacea braving the challenges being faced by India.

Let us see the broad contours of this verdict given by Indian voters:

All people who have predicted a more ‘fractured debate’ (including this author) in the parliamentary elections have been proved wrong by the Indian voters 

The country is likely to experience a relatively more stable government compared to the previous coalition governments in the last two decades or so 

Congress party has made big gains mainly at the cost of the Left parties, BJP and some regional parties 

Manmohan Singh seems to have earned good reputation among voters 

Paradoxically, the communists in India have lost heavily in West Bengal and Kerala; while the whole world has been embracing socialism and state control after the collapse of unfettered free market fundamentalism in the US, Europe and other countries 

BJP leader L K Advani has failed in his audacious bid to become prime minister 

Regional parties led by opportunistic politicians like Lalu Prasad Yadav, Ram Vilas Paswan, Chandrababu Naidu and Jayalalithaa are asked to sit on ‘benches’ for now

In the last five years, the UPA government appears to have ‘earned’ good public image through its NREGS scheme, farm debt waiver and bringing in the Right to Information Act

Moreover, rural people seem to be basking in the glory of higher incomes

 

However, it is obvious that the UPA government during 2004-09 seemed to have escaped the wrath of the voters for its failure to tackle several issues:

job losses in the manufacturing/export sector, 

price rise (do not believe the WPI inflation, look at the CPI inflation which is around 9%) in agri commodities that affected the common people the most, 

farmers’ suicides across the nation, 

horrible internal security (have you forgotten the bomb blasts at Bangalore, Ahmedabad, Hyderabad, Bombay, Delhi etc?),

poor natural disaster management (floods in Bihar and Bombay), 

killing PSU refineries, like IOC, BPCL and HPCL, 

and meager record in the development of roads, ports and power sector.   

 

c. c

Rahul Gandhi: The ‘next Infosys’?

Indian voters have given Rahul Gandhi the status of a mid-cap stock, by promoting him from a small-cap stock. He seems to have graduated to higher echelons after his apparent success in Uttar Pradesh where congress party won substantial seats. Now, the question is can he grow to become a large-cap stock on his own merit. 

 

There is, however, no dearth of congress leaders including Manmohan Singh who sing the praises of Rahul and ‘thrust’ him to Himalayan heights as if he is the ‘next Infosys.’ Unfortunately, many a time in the real world, obvious prospects for growth do not translate into obvious profits (with due apologies to Benjamin Graham). 

 

Many people hope that he can become a game-changer in Indian politics. Let us wait and watch.

“The Left is left out”: It is the latest catchphrase of Indian stock market. This pithy comment from Bombay’s inveterate bull Rakesh Jhunjhunwala sums up the mood of Indian investors after the 2009 mandate. Investors, led by FIIs, may buy into stocks heavily on Monday, the 18th of May 2009. Sensex may hit the upper circuit immediately after the market opening.

Rupee also may strengthen by up to four per cent on Monday and it may touch 45-46 in the next one or two weeks. The prospect of a stable Central government is good news for the bond market. The hope that the next government may push for disinvestment in a big way has fuelled speculation that government’s borrowing may come down in the next one year if disinvestment of public sector undertakings brings substantial money to the government’s kitty.

 

Congress party: Is it reformist?

Even though the congress party has emerged as the single largest party with more than 200 seats, it may not resort to any ‘big bang’ economic reforms that market players are expecting in sectors, like, banking, disinvestment, insurance, pension, etc. If one sees its record over several years, it is difficult to believe that congress party basically is reform-minded, except for a few veterans, like, Manmohan Singh and P Chidambaram. 

 

Even during 1991-1993, it was forced to adopt economic reforms due to the crisis thrown up in the aftermath of our forex reserves reaching an abysmally low level of USD one billion just enough for two weeks of imports. During 2004-09, congress party has cleverly avoided economic reforms by blaming the communists conveniently. 

 

Of course, the communists (except Buddhadeb Bhattacharya) have fought tooth and nail in stalling reforms that would have brought long-term benefits to common people.

In fact, it was NDA government during 1998-2004 that brought a lot of reforms: bringing down interest rates drastically, tax reforms, road development through golden quadrilateral and opening up of telecom sector.

The bigger conundrum for UPA is that its second most dominant partner is the mercurial Mamta Banerji’s Trinamool Congress; the party that had fought a bloody campaign against the Tata Motors’ Singur plant in West Bengal and forced Ratan Tata to shift the ‘Nano’ plant to Gujarat. 

 

No one will be surprised if she plays ‘red card’ for any reforms the congress party pushes for in the UPA. If she really resorts to such blunt tactics, the communists will have the last laugh!

 

Perils of cheap populism

The biggest and immediate challenge for the government is the presentment of full budget for 2009-10. In the last one year, finances of the Central government have become messy and unwieldy, with ballooning fiscal deficit – which is more than 11% for 2008-09, slowing economy, falling tax collections and rising cost of populist schemes, like, NREGS, farm loan waiver and oil subsidies. 

The problem with the congress party is that it firmly believes that these populist schemes have won them the 2009 elections. As such, there is merit in expecting that the congress will stick to its old path of cheap populism. Moreover, none should be deluded into thinking that they will push heavily for disinvestment and such stuff; even in the absence of a communist albatross around UPA’s neck. 

For decades, congress has hung on to power by mastering the art of placating the masses by throwing crumbs/sops to them instead of empowering them with opportunities.


The Hope

India has shown a reasonably good growth over the last ten years in spite of various challenges confronting the country. Whatever government was in power, they had tried to do some reforms though in bits and pieces. And they have shown some consistency. Now, one hopes that the next government may push for economic reforms though in a limited way.


The financial markets will be banking on the following reforms:

Consolidation of public sector banks

Further opening up of insurance sector

Disinvestment through little chunks in PSUs

Stimulating investment demand in the economy across all sectors

Introduction of Goods and Services Tax (GST) with effect from April 1, 2010

Stimulating/motivating Indian banks to lend to the needy sectors


With all-round optimism about a stable government at the Centre, forex flows in the forms of foreign direct investment and foreign institutional investors may again knock at the door of India. However, given the track record of governments, this optimism needs to be tempered with a little caution. 

We need to be cautious because the world economy is still not out of the woods and the world is besieged with protectionism in global trade. In addition, the Indian government needs to do a fine balancing act in reconciling the Consolidated Fund of India.

 

Tailpiece:


THE HEIGHT OF SYCOPHANCY:

On May 16, 2009:

“He can claim the chair whenever he wants!”

-- Prithviraj Chavan, Congress leader meaning that Rahul Gandhi can become prime minister at his own free will and timing

1970s:

“Indira is India; India is Indira!”

-- Dev Kant Barooah, a crony of Indira Gandhi

N.B: Old habits die hard for congressmen. Congress leaders are unfortunately showing their true colours.

Indira Gandhi’s arrogance during the 1970s led to her downfall in 1977. The congress party does not seem to have learnt any lessons from the meanness of personality cult, sycophancy and cronyism.