The wheels of commerce, to borrow a cliché, have been grinding ever so slowly in the last few weeks ever since the country went into election mode.
Businessmen and CEOs that you speak to uniformly have a single response to any question you pose and that is: “we are waiting for the next government.”
This probably reflects their frustration with the outgoing dispensation and its policies which have not exactly been industry-friendly. Yet, the statement is alsoa reflection of their expectations from the new government. Indeed, a survey report of industry body, Assocham, released last week shows that expectations of India Inc. from the next government are sky high.
“The expectation level is soaring by the day among different segments of the economy — stock markets, industry, trade, multilateral institutions and foreign investors’, says the report based on a survey of 450 CEOs from different sectors such as manufacturing, banking, IT, real estate and finance. The survey respondents expect the new government to bring down prices (inflation), interest rates, create jobs and revive manufacturing, all in the next few months.
Nothing wrong in the expectations at all except that it is unrealistic to imagine that they will all happen in the near-term. There is a clear danger here that the weight of expectations will be too much for any new government to bear and whatever it does will fall short, which will, in turn, fuel disappointment and disillusionment.
The biggest assumption underlining these expectations is that we will have a stable dispensation taking charge once the results are out on May 16. All bets on a quick return to growth will obviously be off if we are to get a wobbly coalition government next. However, getting a stable government does not mean that the economic problems will go away immediately. There is no magic wand for the new Prime Minister to wave and immediately cure the economy of its serious ailments. A strong government will only be the first step in a long journey to get the economy back on rails.Issues
Let’s take a few of the issues that need to be addressed by the new government immediately. Price rise is the foremost amongst them. Rising food prices have proved an insurmountable problem over the last three years. The problems lie on the supply side and it is futile to assume that the next government can increase supply of food commodities immediately.
While foodgrain can be released from the overflowing warehouses of the government, the same cannot be said about vegetables, fruits, milk and other protein foods. Prices of perishable commodities always rise during summer and the first indications were provided in the inflation data of March which showed a spike in consumer prices. With warnings of an El Nino strike this year, the predictions for the monsoon are not very favourable too. This is bad news for a new government inheriting the inflation gift.
Rest assured that inflation will not be tamed for the next few months. Assuming that the new government acts immediately to reform the agricultural products chain and procurement policies, the benefits will begin to be felt only by the end of the next few quarters.
The issue of interest rates is linked to inflation and those expecting rates to fall immediately will obviously be disappointed. The RBI’s actions reflect the sum total of the government’s efforts on the fiscal side and the new dispensation has to do a number of things right before the central bank can be willed into softening rates.
The second important issue that India Inc is waiting for the government to address is the slowdown in manufacturing. Consumption, the most important indicator of economic health, has slowed down visibly and that is clearly reflected in the sales of industries such as automobiles, consumer durables and electronics. The government will have to think of stimulus measures to revive manufacturing such as duty reductions/concessions in the first budget that it will announce in July. Reducing income tax to put more money in the hands of the people to spend is another option.
Of course, given the not-so-comfortable position on the fiscal deficit front, there will not be much leeway for stimulus measures. Yet, the fact is that even if such measures are announced, it will be at least two, if not three quarters, before the benefits are begun to be felt.
Whichever party forms the new government, it will have to necessarily focus on infrastructure growth but here again, the benefits will be felt only over the medium-to-long term. The national highways project of the Atal Behari Vajpayee government was a tremendous boost not just to infrastructure but to the overall economy itself as it created demand for downstream industries and generated jobs. What will be the equivalent project for the new government? Will it be inter-linking of rivers if the NDA forms the government, as opinion polls seem to indicate?Stiff challenges
The challenges on the economy front for the new government will be stiff and getting growth back on rails is a long-haul project. Those building up expectations now — including the markets — would do well to remember this.