)
On May 17, 2004, trading at the BSE and the National Stock Exchange had to be halted twice because of free falls in share prices. Following the defeat of the Atal Bihari Vajpayee-led National Democratic Alliance (NDA) in the Lok Sabha elections, market participants were a worried lot. They feared the fractured electoral mandate, one that had given Left parties a say in the affairs of the Centre, would result in a hostile policy regime.
Five years later - on May 18, 2009 - trading at the share market had to be stopped twice, this time due to unprecedented surges in share prices. This was the market's way of celebrating an election verdict seen as crucial to expectations that there would be no stopping key economic reforms now.
Is there any reason to celebrate a decisive verdict and bemoan a fractured mandate?
Typically, a decisive mandate is associated with a host of advantages. A stable government, which a decisive verdict produces, lends a sense of predictability to the decision-making process, and this is perceived to be less risky for investors. "In case of a stable government, you can fix responsibility for any decision taken. With responsibility comes transparency, in due course. However, in the case of a fractured mandate, everything - a bad decision, delay in decision or no decision - is blamed on coalition dharma, which is bad for the country. This is the reason why we need a decisive verdict," says share market analyst Gul Teckchandani.
The advantages of a decisive verdict notwithstanding, have decisive verdicts delivered? Conversely, have fractured mandates resulted in chaos? History presents a mixed picture. "Since 1989, India has been governed by multi-party coalitions at the Centre. This period has also coincided with India's growth take-off. A coalition government has not hampered economic growth in the slightest, if the last two decades are any indication. All the major economic reforms of the early 90s were under a coalition government. So, coalitions can muster the political will to take tough decisions and unleash reforms if the conditions are right," says Milan Vaishnav, an associate with the South Asia programme at the Carnegie Endowment for International Peace.
To understand whether fractured mandates should be feared, let's consider the record of weak governments. Ironically, some of the most enduring decisions had been taken by governments that didn't have thumping majorities in Parliament. The V P Singh government, which survived on support from the Left and the Bharatiya Janata Party, is credited to have provided reservation in government jobs to Other Backward Classes. The Narasimha Rao government, which was short of clear majority for at least two years, led the country to major economic reforms.
The two not-so-stable coalition governments under the NDA and the United Progressive Alliance (UPA) gave us, among others, a nuclear test, golden quadrilateral highways project, the Right to Information legislation, rural employment guarantee scheme and the Indo-US nuclear deal. Incidentally, the UPA-II government, a result of a seemingly decisive verdict, went into a policy overdrive only after it lost support of some important allies. "If one looks at the 2009 election results, the Congress party's seat share increased to 206 seats from only 145 seats in 2004. Thus, according to conventional wisdom, UPA-II was much better placed to take decisive action, as the Congress had a much stronger hand vis-à-vis its coalition partners. But the results do not support this. UPA-I, with a much weaker Congress party tally, succeeded in taking a number of bold decisions - from passing the Right to Information Act to the Mahatma Gandhi National Rural Employment Guarantee Act and ratifying the US-India civil nuclear cooperation deal. By contrast, UPA-II has a much thinner record of legislative accomplishment," says Vaishnav.
However, critics of weak governments point out while such governments do take decisions, implementing these become a major challenge. They cite the case of allowing foreign direct investment in multi-brand retail. Despite a new legislation in place, investors are unwilling to bet their money, fearing policy reversal.
Let's consider the records of governments formed after decisive verdicts. In the post-Jawaharlal Nehru era, the first decisive election verdict was in favour of Indira Gandhi, in 1971. The massive mandate climaxed with the imposition of Emergency in 1975. Media censorship and forced sterilisation were some of the many excesses during the Emergency. In 1984, we had another decisive verdict, following which Rajiv Gandhi became prime minister. His government is known for, among others, the Bofors scam and the Shah Bano case. While the former was the first scam involving the high and mighty, the Shah Bano episode came in for severe criticism, as the government at that time was seen to be bowing to the demands of fundamentalists.
More recently, we had a decisive verdict in 2009. For the first time in many years, the ruling coalition had the support of more than 300 Lok Sabha members. However, the same government was accused of 'policy paralysis' and mega scams such as irregularities in the allocation of 2G telecom spectrum and coal blocks.
History suggests decisive verdicts haven’t really been all that decisive, while fractured mandates haven’t resulted in doom and gloom. “The debate is not about decisive or fractured mandates. We have entered a coalition era and it is here to say. What is important is what does the government do in the first two years of its existence? After that, coalition compulsions take precedence over everything else. We should also take heart from the fact that there is broad consensus among all parties about economic policies,” says Madan Sabnavis, chief economist, CARE Ratings.
Does this mean economy watchers shouldn’t worry too much about election outcome? Is that the reason why share markets are making a dash at fresh peaks without bothering too much about what will happen in Lok Sabha elections next year?
