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Election therapy

Early polls would help investors snap out of wait-and-watch mode

Written by Sanjaya Baru |
August 8, 2013 3:52:17 am

Early polls would help investors snap out of wait-and-watch mode

The Indian economy is going through a difficult phase but it is not in crisis yet. Though late in responding,the government is working hard to make the best of a bad situation. Some of India’s best economic policy brains are literally burning the midnight oil to manage a difficult situation. A slew of policy measures aimed at reassuring investors and attracting foreign currency inflows have been taken.

Yet,few see the economy turning the corner this fiscal. The turnaround,most analysts and investors believe,will come only after the next general election. Ergo,the sooner that general election is held,the better for the economy.

The spending and investment decisions of individuals and firms,as every student of economics from the days of John Maynard Keynes has known,are based more on expectations about the future than the experience of the past. The experience of the Indian economy over the past decade has been robust,a fact to which Prime Minister Manmohan Singh has drawn repeated attention,but today’s spending and investment decisions are shaped by a dimmer view of the future.

On the upswing of an economic cycle,workers,consumers,savers,investors and entrepreneurs imagine a future that is brighter than the past. On the downswing,they imagine a future dimmer than the past. It is the optimism about “India Rising”,based on the impressive growth performance of the 2003-2009 period,that generated the expectations which in turn contributed to the UPA’s impressive electoral performance in the summer of 2009.

The less-than-impressive performance of the economy since 2009,and the even less impressive performance of UPA 2 till recently,has turned sentiments negative. Today,the future is seen as dimmer than the past. The UPA government’s heroic efforts to revive sentiments are yet to bear fruit. The question is,will they?

Apart from the challenges posed by a difficult external environment,a key restraint on new investment decisions is political uncertainty. Will a minority government on daily wages,so to speak,be able to take and stand by difficult decisions? Even if a decision is taken,what about implementation? Is it not better to wait and watch and see who comes to power next?

True,in 1996-98,the governments of H.D. Deve Gowda and Inder K. Gujral continued the policies of P.V. Narasimha Rao. But P. Chidambaram offered an element of continuity in those governments. True,the government of Atal Bihari Vajpayee did not reverse any of these policies,despite criticism from within his own Sangh Parivar (by ideologues of whom economist Jagdish Bhagwati once colourfully said,“if they are economists,I am a Bharatanatyam dancer!”). But Vajpayee,like Narasimha Rao,proved to be a great pragmatist and a coalition builder.

In 2004,investors were nervous about a “Sonia Congress” dependent on the left. One of Sonia Gandhi’s first decisions after results were out in 2004 was to get Manmohan Singh to address the media and reassure investors. Singh’s economic policy team and foreign policy initiatives further boosted investor sentiment. In UPA 1 the economy marched forward.

The fatal blow to this sense of investor confidence was struck by a series of irresponsible policy actions taken by UPA 2. Desperate attempts have been made,and continue to be made,to reverse that trend,offer assurance and inject a sense of optimism in investors,savers and consumers. The jury is still out.

India has been here before. The monsoon and winter months of 1990. The government of the day understood the gravity of the situation. In December 1990,the then finance minister,Yashwant Sinha,sent Reserve Bank of India deputy governor C. Rangarajan and the government’s chief economic advisor,Deepak Nayyar,to Washington DC to negotiate a standby arrangement with the International Monetary Fund (IMF). When Rajiv Gandhi suspected that the Chandra Shekhar government was trying to stabilise the economy and itself by securing IMF assistance,he pulled the rug from under its feet. Elections were called,but they got delayed by Rajiv’s tragic assassination.

The economy paid a heavy price for delayed action caused by political uncertainty and the inability of a lame duck government to act decisively. Poor Yashwant Sinha has not yet forgiven Manmohan Singh for stealing his thunder. In a recent newspaper column,Sinha reminded us that much of what Singh did in July 1991 was in fact what he had intended to do six months earlier but was prevented from doing by a Congress that preferred to get elections out of the way before allowing the government to go to the IMF.

If,in the next few months,the external pressures on the Indian economy do not ease,the government will be caught on the horns of a similar dilemma. No government would be in a position to go to the IMF,if such a necessity were to arise,before elections. Indeed,as we now see playing out,even if the government were to take proactive measures to attract foreign capital,or encourage Indians to bring back the dollars they are holding outside,or appoint a former IMF chief economist as RBI governor to reassure global investors,most would want to wait and watch.

Investors,both Indian and foreign,are in a “watch and wait” mood. It is unlikely that this mood will change till the general elections are completed and a new government takes charge. That new government may well be this government. I am not suggesting that investors want a new team in office. They may well be satisfied with the existing team returning to office. But they want this team to secure a renewed mandate and make its choices about key economic portfolios so that they can feel more confident about taking long-term investment decisions.

These domestic uncertainties may be compounded by external ones if the global strategic and/or economic environment turns more hostile. Higher oil prices,a stronger dollar and other factors could exert even more pressure.

To add to all this,incompetent management of political challenges at home,like the situation in Andhra Pradesh,or constant pressure from China and Pakistan on the border,can further weaken investor confidence in the government’s political,strategic and administrative competence.

For all these reasons,the economy is in clear danger of being weakened further by political uncertainty and incompetence. An early election should help clear the air.

The writer is honorary senior fellow,Centre for Policy Research,and former media advisor to the prime minister of India

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