The Code of Conduct under the Election Commission of India states that government cannot announce new projects, programs, concessions or financial grants to influence the voters a month before the actual election date. But even this six month period leading up to the elections actually might define the way forward for our country in the coming years. And as always the policy shakeup or amendments that might be introduced will affect the economy in a big way.
The fallacy of incumbent governments
But why is it that in emerging economies with democratic regimes, incumbent governments lose their focus? Somehow always the priorities shift from striving towards a long term goal to a short term fix that enhances their chances of re-election. Venezuela miserably failed to continue social reforms in times of economic crisis. Money that was supposed to target inflation and shortages was instead spent on social justice, social welfare, education and military recruiting.
Granted that such policies are signs of a developing economy, but really at what cost? If one wants to look at India, don’t look back more than 2014. The UPA government like any third world incumbent government depended on tax cuts and subsidies. But they were unsuccessful in tackling the NDA which ran on growth and good governance. They failed then, and now, almost five years later history is repeating itself, albeit with the roles somewhat reversed.
The recent sparring between the government and the RBI governor was a result of different viewpoints. RBI with its long term outlook and a strategic plan to keep inflation in check had every right to exercise its authority. But with elections just around the corner the government cannot afford to be cavalier about its chances of re-election. Hounding the RBI for not resolving the liquidity crisis much faster was at best not thought rationally. Being the central bank, it was RBI’s responsibility to look for long term goals and government criticism was something like punishing a regulator for showing too much regulatory zeal.
The difference of opinion and strategic plans could not be more evident and the divergence speaks for itself. All of this is done to sway undecided voters which seems like a harsh price to pay for the economy.
The most important weapon in the government’s arsenal is however fiscal spending. Proven and tested, fiscal spending is a safe option to go for. Not only is the fiscal spending greater but the amount of tax cuts and subsidies provided also increase. Now taking into consideration the recent volatility in the markets, the NDA government has also to some extent given in to populism to counter anti incumbency and lift market sentiment. Looking back, we can find that in seven out of the last eleven times, the fiscal spending increased significantly in election years. It has been quite well known in academic circles and policy makers have also paid attention to these theories of increased government expenditure that will boost employment and market sentiment.
Only in the years FY-84, FY-99 and FY-09 did the incumbent government was re-elected to power. The last incumbent government to be successful was the UPA I regime which had already embarked on an expansionary fiscal policy due to the 2008 global economic meltdown. This regime had waived off farm loans, expanded social security through schemes under National Rural Employment Guarantee Act (NREGA) and implemented revised salaries of central public servants through recommendations from the Sixth Pay Commission.
Overall one can see that incumbent governments have fallen prey to implementing populist policies that might endanger a more stabilized and gradual approach to solving certain situations. The current regime however has proven itself to be par with the best of regimes in terms of implementing a number of reforms like GST, FAME and Demonetization. However the success or failure from the perspective of a political analyst will only depend on the chances of re-election which necessarily does not mean strategic long term goals, but short term appeasements in alignment with the populist platform.
A major factor to consider at the time of elections is market sentiment and investor confidence. Dalal street, already well known for its knee jerk reactions to election outcomes, showed it again last Monday why confidence among investors is key. Even the news from exit polls that the incumbent government at the centre might be in for a shock defeat was enough to make equity indices plummet by two percent.
Investors care less about which government is in power, but what they fear above everything else is uncertainty. For investors it is much easy to adjust to the idea of there being a unified chain of command and smooth transition from one ruling regime to another. But this situation rarely happens, as often the new regime resorts to its new agenda and it will differ from the populist policies of the previous years.
In conclusion, it is clear that elections do impact the macroeconomic scenario in the country. These factors however don’t affect the economy directly, but does more so by influencing policy decisions that are undertaken. The general elections in India will be held in April 2019, how the markets and economy reacts to the results, remains to be seen.