The prospect of continuity and a stable government has enthused the markets in an extraordinary way

Even a stable government need not necessarily usher in economic reform, at least the way the markets perceive. A larger issue is to understand and define reforms in the changed context.

The stock market’s record breaking run on May 18 has been interpreted as a resounding endorsement of the election results. The Sensex and the Nifty gained 2110 points and 651 points over the previous closings on May 15.

Many analysts aver that the markets had already anticipated a favourable outcome. In the run up to the counting of votes and the declaration of results, the markets remained buoyant.

Although there were other factors for the improvement in market sentiment, it is likely that the market participants had guessed that the elections would make possible the formation of a ‘stable’ government at the Centre. In the event the extraordinary performance of the Congress party came as a big though pleasant surprise for the markets.

Flawed analysis

According to popular view, a stable government would usher in economic reforms and that would be good for the markets. It is not just stability but economic reforms on top of stability that the markets seem to be hoping for.

An analysis on the above lines can be both imprecise and misleading. Stability, at least the market’s perception of it, was generally interpreted to mean that one of the two national parties will be able to form a government without the support of smaller, troublesome allies.

But does it matter that it is the Congress and not the BJP that has made those impressive gains and is in the driver’s seat? Which of the two parties is more market friendly? In short, did the stated positions as indicated in the election manifestos of the Congress and the BJP matter before the first vote was cast?

The crux of the matter is that even a stable government (however defined) need not necessarily usher in economic reform, at least the way the markets perceive. A larger issue of course is to understand and define reforms in the changed context, both domestic and global.

It is perhaps too much to credit the markets with such reasoning. What seems reasonably clear at this stage is that the prospect of continuity and a stable government has enthused the markets in a way no other development could have.

The fact that on Tuesday the benchmark indices held on to the extraordinary gains of Monday shows that the optimism might be widespread. It is likely that the election results have pushed the stock markets to a higher trajectory and that would be a significant achievement.

Not to be ignored, however, is the fact that Indian markets have been moving up along with many other stock markets both from the developed and the developing worlds.

There is a growing belief that the worst of the global economic and financial crisis is over and the rising stock markets herald real economic recovery. In such a context the election results might have come as a catalyst, actively aiding the already strengthening sentiment.

Global cues will remain important for many more days to come. The quality of corporate earnings in India will be closely watched and may in fact be the most significant factor giving a direction to the markets. Within India attention will also be on the macro economic management by the new government. Obviously arresting the economic slowdown and rediscovering fiscal prudence will be priority areas. The Union budget for 2009-10 is due to be presented soon .The game of guessing the Finance Minister’s budgetary proposals has already begun.

The stock markets will naturally anticipate budget related developments. There will be heightened expectations this time as to economic reforms. It is naïve to think that the new government, however stable and free to carry on with its economic agenda, will strike a course of action radically different. For one, the Congress party’s success has followed its execution of several populist schemes such as the NREGS and the loan waiver.

Subsidies of all kinds have bloated. It will be too early now for the new government to change course even if that is practicable. Even before the budget, the issue of petroleum pricing will crop up.

Reforms need a re-look

Two, economic reforms as understood just five years ago need to be redefined. In their widest connotation reforms have meant a withdrawal of the state from areas in which it had a dominant role.

Economic reforms of this genre include policies designed to attract private capital, both Indian and foreign. One of the methods for increasing the private sector’s role is through the public sector disinvestment programme.

At this juncture a disinvestment programme for the public sector can only mean a dilution of stake by the government without relinquishing its control. Outright privatisation will not be politically expedient.Besides, with the global recession still on; foreign capital flows may not be of the magnitude hoped for. As for the role of the state, even in advanced capitalist countries the public sector is expanding, through deliberate policy measures. In banks, insurance and automobiles, the U.S. government has stepped in to save many companies. It seems ridiculous to harp on privatisation.

Of course, a stable government is better placed to present its case on reforms or any other economic measure that will have to be sold to the public at large. These take time and stock markets cannot hope for miracles in the short term.

C. R. L. NARASIMHAN