If change does come in 2014

November 29, 2013

(Any opinions expressed here are those of the author and not of Thomson Reuters)

The market is pregnant with expectations of a change after the general elections which must be held by next May. You would have to travel far and wide before you come across anyone in India’s financial market who is not hoping – even praying – for change.

The mood on the current policy direction is so gloomy that any alternative is looking like manna from heaven.

I am obviously not competent – I doubt anybody really is – to predict the outcome of the elections. In a vast and varied country like India, forecasting national trends with any degree of reliability is hard. But it is safe to say that a strong momentum for change is being built by BJP’s prime ministerial candidate Narendra Modi.

While a victory for the BJP is far from certain, it is still pertinent to reflect on what a Modi-led central government could mean for the markets and the economy.

The one thing that almost everyone agrees on is that Modi is excellent in his execution – he knows how to drive the state machinery, is quick in making decisions, and has the ability to see his decisions reach its logical end.

The Gujarat chief minister is said to be relentless with the bureaucracy and has little tolerance for sloth, which is the bane of most government offices in India. Given his track record, one can expect a major shake-up in Delhi’s bureaucracy if Modi becomes the prime minister.

On the other hand, Modi’s track record on pursuing significant and structural economic reforms is not quite as good. He has improved efficiency in Gujarat’s PSUs but has taken no steps to privatise them despite his reportedly avowed belief that the ‘government has no business being in business’.

And despite public pronouncements, he has hardly taken any steps toward labour and agricultural reforms at the structural level in his state. Even at the centre, I believe the pace of reforms under his stewardship would not be as much as the market would like to see.

Most importantly, investors need to be cognizant of the reality that many of the problems besetting the economy have no quick remedies. And the remedies themselves are politically difficult to swallow, especially in a coalition setting.

For instance, welfare policies will be extremely hard for any new administration to reverse. It is the same for inflation.

The spiral of high wages driven by wasteful government spending on leaky welfare schemes and subsidies which are not supported by adequate improvement in productivity will also be hard to break.

Whether there is a change in government or not, a fresh political mandate in 2014 will hopefully reignite decision-making in New Delhi. That alone would revive market sentiment, and hopefully lift the economy.

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