Life is full of uncertainty. Any business factors this in, especially if hedging and risk-mitigation instruments exist. However, political uncertainty doesn?t belong to the same category. If nothing else, instruments to hedge against this don?t exist. Consequently, cross-country empirical research exhibits a strong correlation between political uncertainty and investment decisions.
The issue isn?t a simple one of coalitions, since minority governments and coalitions aren?t necessarily unstable. The more serious problem is one of policy uncertainty that follows political uncertainty. Do we have a government? Is the DMK withdrawing support? Will we have mid-term elections? Or will the government last with SP support? No, the DMK won?t withdraw support. Will we go through the same process when negotiations are held with Trinamool? Do we have governance and ethical deficits, as the home minister argues abroad? Or are we fine, as the finance minister argues at home? Will we have a major Cabinet reshuffle? Is it true many Cabinet ministers are unhappy with their portfolios? What is the policy if ministers squabble in public?
Coalition dharma characterised UPA-I too. One might have been unhappy with UPA-I policies, but there wasn?t this general sense of drift. Spectrum scams may have affected telecom investments directly. But the malaise under UPA-II runs deeper. Environmental clearances are a case in point. No one can object to environmental clearances. However, how can clearances once given be overturned with retrospective effect? In a broad sense, sanctity of contract, defined in the policy context, is being questioned. Even outside the environment domain, no one knows what the policy is.
Are we opening up FDI in multi-brand retail or not? Are we implementing food security legislation? Have we decided what the BPL population is? This drift, driven by a hydra-headed government that talks with several heads, is continental in nature and is more important than scams and corruption per se.
Investment decisions tend to be lumpy. They can be postponed until excess capacity is exhausted. While FDI inflows to India have declined, what is more dangerous is the postponement of domestic investment decisions. Note that projections of 9% growth are based on assumptions of an investment rate of at least 36%, assuming the Economic Survey?s incremental capital output ratio of 4.
We may eventually get to a stage where the central government becomes completely irrelevant. But we haven?t got there yet. Consequently, we need a government to announce policy and implement regulation. Unfortunately, there is an impression?and perception is just as important as fact?that there is no government. Given this, it can be no one?s case that investment decisions aren?t affected. Some investment decisions continue and are influenced by state government policies. However, where the central government is concerned, such decisions are postponed.
Witness the contrast between development of minor and major ports. The former are under state governments and flourish. But the latter languish. The home minister was partly wrong. Governance is different from government. However, governance requires a government. We don?t have a governance deficit. We have a government deficit. We don?t need to reinvent government. We need to establish India isn?t anarchic.
The author is professor, CPR
Of late, the government has had its hands full with issues like the 2G spectrum scam, bribery cases, SC striking down the CVC?s appointment and management of its coalition partners. These factors have come up within a short time frame and have engaged the
attention of the government. They are also on the top of the mind of
market participants, who have been treading the markets cautiously. There are concerns that these factors could act as a deterrent to faster
decision-making, leading to delays in investments and reforms. The markets have witnessed FII outflow of about $2bn from the Indian markets in the current calendar, after getting record flows of about $29bn in the previous calendar year?2010.
The important point to ponder over is, whether these factors will substantially impact the economy and markets in the long term. My view is that they won?t. Coalition politics has existed in India for several years now and has been accepted as a reality in this democracy. And so have been the inefficiencies or corruption at various levels. However, important decisions have been taken and the country has grown at a fast pace despite these hurdles. Landmark decisions like those on the nuclear policy and divestments were taken despite coalition compulsions.
My view is that it is macro issues like inflation, crude prices, interest rates, fiscal deficit, global geo-
political situation, reforms etc that will have a relatively more pronounced impact on the markets.
Inflation, especially food inflation, has remained stubbornly high
and supply-side issues have to be
tackled to moderate it. The government has initiated steps in the budget to address these issues.
But there are some factors like international crude and commodity prices over which the government has little or no control. With crude prices near 29-month highs, India is at risk because it imports more than 75% of its requirements. The Indian crude basket has touched $110 a barrel, which is a matter of concern. Sustained crude prices may once again stoke inflation. They may also impact our current account deficit and fiscal deficit. The government will have to either raise fresh resources or cut down on expenditure (including subsidies) with a view to managing the fiscal deficit. Along with crude, other commodity prices have also moved up. This rise may continue to impact companies? margins. These macro factors will potentially have a larger impact on the markets as compared
to the transient factors mentioned at the beginning.
The government, for its part, has initiated a process of reforms in the recent budget. Several bills like those on the financial sector, Food Security Act, provision of cash subsidy etc are expected to be introduced during the current year, after political consultations. GST and DTC will most likely be introduced in FY13. I am of the opinion that these are very important reforms which, once implemented, can change the outlook for India.
Thus, I feel that though the transient factors may keep the markets subdued in the short term, in the medium term, it will be liquidity, quarterly numbers and monsoons that will engage the markets? attention. But the long-term trend of the markets will be dictated by macro factors like inflation, commodity prices, reforms and the fiscal deficit.
The author is director, Kotak Securities
