‘Verdict will add momentum to the India appeal’

On the macroeconomic implications of the election results.
The 2009 election verdict is perhaps the best outcome for turning what is a good, evolving Indian economic story into a great one.

There’s three aspects to it: first, the fact that government and the ruling coalition will be more politically stable is a good signal. A lot of the fears that the market had about the emergence of a Third Front or a Left-dominated coalition have not materialised. And now, the Congress will have a much stronger position in the ruling coalition.

Second, it’s great news as far as the potential for more reforms is concerned - whether it’s disinvestment, further liberalisation of the FDI regime, financial and banking sector reforms, and even something like freeing up local fuel pricing. All of these have from time to time been blocked within the previous government either by the Left or by socialist elements within the Congress. That’s going to change.

Third, one of the key concerns with investors was in terms of the fiscal dynamics. There was a worry that if the Third Front or Left-related elements had come to power, there would be very little regard for fixing the fiscal challengers. I think that will get addressed in a fairly meaningful manner now. The government is unlikely to be irresponsible and will focus on checking subsidies to the extent possible, and more importantly go ahead with fiscal consolidation efforts.

My sense is that, coupled with a lot of these positives that the elections have thrown up, it’s perhaps the best verdict Indian votes have delivered in almost 20 years.

With the broader underlying story at the macro level, which was beginning to improve, this will add greater momentum to the broader India appeal.

Expectations from Budget
The first real indication of the new government’s policies will be the Budget, due in June. I don’t think the budget deficit will be larger than it was last year: we’re talking roughly around 6.5% of GDP at the federal government level. But it’s more important to come up with some initiatives that are somewhat comforting to investors: a statement of intent that says, ‘the fiscal side may have had to bleed more because of the economic downturn, but over the next two to three years, measures are going to be taken to try and consolidate fiscal finances.’ That is going to be a very important signal.

That would include a combination of fiscal reforms and, potentially, a second verison of the FRBM act, a variety of different things.