Expert Zone

Straight from the Specialists

Economic consequences of deadlock in Parliament

September 6, 2012

(The views expressed in this column are the author’s own and do not represent those of Reuters)

The monsoon session of Parliament has been a washout without any important business being transacted. This has been made out to be a political strategy on the part of the Bharatiya Janata Party (BJP) to force early elections. Obviously, the Congress-led coalition is unlikely to oblige. The unintended victim is the economy which has been stopped from getting back to growth.

There are a number of important Bills pending in Parliament. The Banking Laws Amendment Bill, the Pension Fund Regulatory and Development Authority Bill and the Insurance Laws Amendment Bill, when passed by Parliament, could have attracted foreign investment.

But political games have to have priority. And looking at the targets and strategies of political parties it is unlikely that Parliament would resume legislative work any time soon. The economy had already lost its momentum with growth dropping from 9 to 5.5 percent, landing the economy into growth stagnation.

The government has been suffering from some kind of inertia. Moody’s Analytics described it as having ‘lost its way’. More rating agencies may be of the same view and with no reforms in sight and no improvement in governance, it is likely that the country may be downgraded. But that will not make much of a difference because growth will not drop any further and the stock market will not plunge any deeper. The economy will just muddle through until 2014.

Prime Minister Manmohan Singh and Finance Minister P Chidambaram seem determined to change the trend. Two expert committees were appointed to suggest steps to reverse policy pessimism. The Shome Committee has recommended postponement of GAAR by three years and greater scrutiny of the Supreme Court verdict in respect of Vodafone. That itself livened up the stock market which had landed into depression since the budget. The Kelkar Committee made the inevitable recommendation for an increase in the administered prices of diesel and LPG.

What is now necessary is action. But action is possible only after the present session of Parliament. The recommended increase in the price of diesel and LPG will be a test case. Will the government take the bull by the horns or will it succumb once again to pressure from its allies?

If the government acts quickly, a lot more can follow. The reduction in fiscal deficit with revision of diesel and LPG prices will encourage the RBI to cut interest rates. This if combined with FDI in retail for which parliamentary approval is not necessary, will kick-start the economy and give a further push to the stock market. Before the end of October, the Sensex can cross 19,000.

But if the UPA government splits because of differences on action, an early election is inevitable. Going by experience, the Congress would not risk that even if it means continued growth stagnation. Chances are the government will act and the economy will recover.

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