With the dust settling down on the State elections, attention has naturally shifted towards the economic implications of the results. The overwhelming interest on the political discourse will never go away soon but since the Union Budget has already been scheduled in this week, there is a feverish anticipation of what impact these election results will have on the national economic policies. A day before the Budget, the Reserve Bank of India will review its credit policy. Besides, there would be other weighty economic policy announcements — the Economic Survey and the Railway Budget. What impact will the election results have on these?

The budget as indeed, all the scheduled policy announcements have been in the works for several months. Besides, State elections are not necessarily fought on the national economic issues, although, like on some previous occasions, voters' dissatisfaction with the price rise seems to have been a factor. It is indeed possible that the price rise was exploited by political parties in Opposition as part of an anti-incumbency factor.

Crux of the debate

The crux of the ongoing debate over the State elections and the future economic policy making is this: Is it possible for the Centre to push ahead with the economic reforms in a context where the ruling UPA-II has fared badly in the elections? One can look at the track record of parties, such as the Samajwadi Party, when they were in power and still not be any wiser as to how they will act in today's context. For instance, commentators have pointed out that the sugar industry, a main prop of the economy of Uttar Pradesh, flourished substantially when the SP last ruled, but had to bear the crushing burden of high cane prices mandated by the BSP Government. However, one needs to be careful to draw inferences on the basis of presumed ideological preferences of these parties.

Moreover, it is not as though the ruling coalition, especially its dominant Congress party, was always in the forefront of economic reform, but was hobbled by allies and opponents alike. In fact, much before the State elections were announced, the Congress party was seen to be a laggard in pursuing reforms, even those which it can rightly claimed to have authored.

Opposition to reforms

Again, talking of the outcome of State election results, strident opposition to reforms — a hike in the prices of transportation fuels and FDI in retail — has come from Mamata Banerjee, an ally who did not participate in the recent elections. There is yet another problem when it comes to examining the reform orientation of political parties in the changed context. A few reforms such as decontrol of diesel prices are inherently more sensitive than, say, the long range planning involved in introducing the Goods and Services Tax.

It is mainly for the above reasons that one hesitates to take a considered view on what the State elections mean for economic policy, especially in the context of the forthcoming Budget. Yet, mainly stock market-centric analysts but also a few others would see clear cut messages from the State election results. Their unanimous view is that the economic reforms will now take a backseat.

Leading brokerages, in their well researched reports, feel that the Congress party has lost what little political space it had to push through with reforms, which are, prima facie, unpopular. Some ‘ muddling through' in economic policy making is inevitable and in the circumstances that would not be a bad option for the markets.

There could be some emphasis on fiscal consolidation and investment in infrastructure but such steps will be taken out of sheer necessity and may not reflect a reform mindset. Structural reforms such as foreign direct investment in retail are simply ‘no-no'. Even pension and insurance sector reforms might be put in cold storage.

Other reports fear that there might be a step up in populist measures and handout more sops leading to further fiscal slippages and movement away from reform. Amidst such despondency over the election results, a few have expressed the view that economic governance in its entirety — not just individual reforms — will be spruced up. After all, voters have expressed themselves strongly in favour of better governance whether at the Centre or at the States. From the prism of the stock markets such views are normal. But it has been proved time and again even well considered analyses of stock behaviour in the wake of some seminal events (election results?) need not be enduring. An important reason for this, of course, is that markets might have already lowered their expectations. (For instance, neither the Congress nor the BJP had a ghost of a chance in U.P.). To the extent, the outcomes matched the expectations. There is no case for ‘rerating' economic policy at the national level.

On the day the results were announced, leading stock indices fell to their lowest levels in five weeks. But as has been the case many times before, the stocks perked up after a fall with the turnaround being attributed to global cues.