What A Big Investment House Says About Indian Elections
from undisclosed source
submitted by productive employee Max Power

Indian elections vote the Congress back to power

The Indian elections have resulted in the ruling NDA coalition being voted out of power. This has been an upset victory for the Congress as most exit polls had predicted between a 220-250 seats for the NDA coalition. The Congress and its allies have got a lead over the NDA. Neither of the two coalitions has got a majority and the Congress would have to take the support of the Left and Communists to form a government.

Table 1: Party position in 14th Lok Sabha (Lower house of Parliament)
Party/ Alliance No. of seats
Congress + Allies 221
CPI (M) 32
SP 35
BSP 20
BJP + Allies 188
Source: Election Commission of India

Political Implications

It is difficult to predict the political implications of a Congress led government supported by the Left. Both these groups have not contested the elections on a common platform like the NDA did. To form a stable government at the Centre these groups will have to evolve a common minimum program (CMP). It is currently not clear whether the Left parties will join the government or they will support the government from outside, resulting in a minority government. This could have implications on political stability. As is clear from table 1, either the Samajwadi Party (SP) and the Bahujan Smaj Party (BSP) could also form part of the Congress government. The stability of the government will be dependant upon the parties that join the government and the composition of the cabinet and allocation of important economic and political portfolios. Implications for Economic Policy Posture The Congress party initiated the process of reforms in 1992 and in our opinion will not take a policy position fundamentally opposed to the current liberalization programme. The Congress key highlights of the Congress manifesto for the economy are as under –Industry – Focus on revival of industrial growth by providing incentives for boosting private investments. The system for approval of foreign direct investments (FDI) would be made more transparent. Competition will be deepened across industries by introducing professionally run regulatory organizations.

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On privatisation the manifesto sounds a cautious note by stating that the Congress will approach privatisation selectively. The manifesto states that disinvestment will not be resorted to meet revenue targets. On the fiscal policy front the manifesto promises to eliminate revenue deficit of the central government over five years to allow more investments in social and Congress scores an upset victory over the BJP Political stability contingent on evolution of a common minimum program physical infrastructure projects. The Congress manifesto also talks about raising the tax to GDP ratio to 14-15% and introduce VAT (value added tax) to check tax evasion. In our opinion the Congress party will not be fundamentally antireform.

The key roadblock to reforms will be in the form of the Congress reliance on the Left parties to form a government. The left party manifesto states that foreign companies should be barred from entering the insurance sector and strengthening the position of the state owned government companies in the sector. The manifesto of the communist parties also opposes privatisation as it declares that the sale of public sector assets results in the transfer of public resources to private hands.

What can the new government do or not do?

Against this background, the scope for populist policies has increased and some of the pending but contentious reforms are unlikely to be implemented. At the same time, we also believe many of the reforms initiated by the BJP government including privatization are likely to proceed albeit at a slower pace. The reforms that are pending and unlikely to go through are summarized below.

Table 2: Key contentious reforms
Reform Comment
Labour Legislation to liberalise labour laws have been pending in parliament for two years. The
pending legislation makes it easier for firms to hire and fire employees and restructure.
Fiscal deficit Operating deficit of the central government is proposed to be eliminated by FY2008.
Taxation Electoral exigencies forced a delay in the introduction of the VAT.
Interest rates
To reduce the government's interest rate, the interest rate payable on government mandated
small savings was intended to be aligned with that on yields on government securities. At
present, small savings offer returns of upto 9.5% compared with the 10 year bond yield of
5.2%.
Source: UBS
The scope for populist policies has also increased substantially. Specifically, we
believe that reduction in subsidies or raising the tax effort (tax to GDP ratio)
from the present level of 9.3% of GDP is now looking difficult. The planned
introduction of the value added tax (VAT) that would have raised the tax to
GDP ratio by 0.5% is likely to take a backseat. Central government subsidies
presently at 1.6% of GDP could potentially increase particularly, as a weak
government would be reluctant in raising subsidized kerosene and cooking gas
prices.
The fiscal issue becomes even more important considering that the BJP
administration had not put in any structural measures to consolidate the fiscal
position, with the exception of deregulating oil prices. Much of the improvement
in the fiscal deficit during the BJP reign was in FY 04, a period when there was
a confluence of favourable factors such as low interest rates, strong growth and
buoyant asset markets. A reversal in these factors alongside, an increase in
subsidies or the absence of improvement in the tax to GDP would be expected to
be a negative for the fiscal position.

posted by prof_booty | 02:24 PM