The Economy and Elections – Impact in 2014

May 12, 2014

Author: Jasjeet Kaur, Executive Director at Imarticus Learning

The economic data for the October-December indicates a 4.7 percent GDP expansion with India’s economic growth remained below the 5 percent mark for the 7th consecutive quarter. India’s growth rate has been below 5 percent in two consecutive years for the first time post liberalization in 1991.Investments have declined and there is contraction in demand leading to a 1.9 percent decline in manufacturing.

Some good news however, there has been a slight expansion of industrial production: 0.1 percent on year in January,. Retail inflation though higher than target has declined consecutively for the last 3 months to a 25-month low of 8.1 percent. Also services like finance, insurance and real estate grew 12.5 percent from the previous year but this is a tad too late for congress party as we get closer to the election results in May.
The congress led UPA has been accused of mismanaging the economy over the last 2 years .They were unable to control inflation and manage the rising current account deficit. There was lack of fiscal discipline and inability to attract foreign funds. This fiscal apathy along with unabated corruption scandals is likely to impact the election results significantly. According to a study conducted by Lok Foundation and the University of Pennsylvania’s Center for the Advanced Study of India (CASI), which tracked 70000 respondents across 24 states, voters are more concerned about the economy than caste and religion.

A lot of recent reports by leading banks and economists state that India’s fundamentals are strong and will revive in a politically stable environment. According to an HSBC report, normal business conditions could prevail after the elections (results will be out on May 17) and “pent-up demand should be released.” Leif Eskesen, HSBC’s chief economist for India said, “As we move into the next fiscal year, we will see growth gradually pick up and move above 5 percent.” This is the hope with which the electorate has gone to vote and choose their leaders for the coming 4 years.
While it is impossible to predict with any certainty the outcome of an Indian election,a recent opinion poll by Hansa research estimated that the BJP will attain a clear majority with 275 seats in the 543 member house.The BJP on its own would win 226 seats — the highest tally ever for the party and the best by any party since 1991.The UPA would win just 111 seats, with Congress sinking to its lowest-ever tally of 92 seats. According to a Moody’s spokesperson, “If a coalition of smaller, regional parties without a common economic reform agenda were to take the helm, it would likely provoke further capital flight, thereby increasing borrowing costs and weakening the Indian rupee, and delaying economic recovery.”
Though Narendra Modi is seen as pro growth & pro business, his party has not offered any confidence to the industry with regards to policies to drive investments. The BJP’s negative stand on FDI in retail has not helped either. The incumbent government is going to inherit a massive subsidy bill in a weakening currency environment. This will be further compounded by the impact of late season rainfall and hailstorms in March that have already caused losses in excess of Rs 13,000 crore.

The run up to the election results is going to be a stressful one for investors, consumers, manufacturers, economy including businesses like Investment Banking at large, until we get a clear mandate on the next government and it’s structure.

Ref : India’s Economy in the 2014 Election,Malini Bose

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