A new government: business as usual?

Business as a rule loves stability. They could not have asked for a better verdict from the 2009 elections. The UPA government has come back to power, much stronger with about 260 seats in a 543-seat parliament. In the previous election, it was much dependent on a number of smaller allies, hampering effective functioning especially on the economic front.

In 2004, the government that came in inherited a growing economy. All it had to do was maintain course. But now, the economy is in a difficult position. Even if conditions are not worsening, they are not improving either. Industrial growth continues to slide and exports are declining at an alarming rate. The government’s revenues have slipped as a result and it has already cut duties and given concessions. There is little more it can do.

 

In about a month or so, the new government will tally its finances and present its Budget proposals. It is not in a position to make new major concessions. It can choose either to do nothing or to try and hike revenues by tinkering with excise and customs duties. It can do so, smug in the belief that there will be no tantrum-throwing ally to upset the apple-cart.

 

An unused weapon for the government to raise funds is the majority stakes it holds in government companies. Banks, telecom, oil, power and engineering are some of the major sectors in which the government still owns significant stakes. Even small disinvestments will fetch it sizeable amounts.

 

Falling interest rates have been one of the highlights of monetary policy in the past 12 months. But one borrower is priming to spoil the party. The government will unleash a massive borrowing programme to finance its spending. Though the RBI will be on alert to ensure the government does not completely squeeze out other borrowers, some sucking of liquidity is inevitable. A revival in global credit markets and domestic equity markets could provide alternate funding to Indian companies, giving the government a free hand to borrow. But benchmark interest rates in the near future are unlikely to see the rapid fall they’ve seen in the past 12 months.

 

Will we see a quickening of the reform process? The Left had put a spoke in virtually all major reforms. The UPA has no excuse left to stall reforms. Even after the Left exited the government, there was no major move to initiate reforms. If the prime minister had his hands tied by his coalition partners, this time he could not have asked for a freer hand. It is time for him to live up to the moniker of a reformer. A common Goods and Services Tax will most certainly be pushed ahead on the agenda. A relook at foreign investment in several sectors is also likely, especially as America uses its post-nuclear deal muscle with India to seek reforms in sectors like banking. Since the government appears to have a secure term, it may go in for direct tax reforms. This may see the elimination of a host of exemptions that companies and individuals have got accustomed to. A 5-year roadmap to reforms, if the government can prepare it, would be a good way to begin.

 

In 2004, the market greeted the arrival of the government with a stunning decline. In hindsight, that proved to be a mistake. In 2009, it has given a 1790-point salute (at 11.15AM), a gain of 15%. That indicates a huge expectation built in, post-elections. Has the market got it wrong this time too?