What happens when Lok Sabha polls are held in shadow of economic crisis?

The 2019 general elections will be held amid economic challenges -growth has remained stable, but the rupee has plunged to record lows, and rising crude oil prices could wreak havoc on govt finances

Since the early 1990s, there have been five instances when India’s general elections have been preceded by a sharp deterioration in the country’s economic climate.

For three of these five instances (1991, 2013 and 2018), the downbeat economic situation could be traced in parts to a rise in the country’s current account deficit — a result of rising crude oil prices and a fall in the currency’s value. In the other two episodes — 1997 and 2008 — the origins of the economic slowdown were outside of India. But in three of the five instances (1991, 1997 and 2013), authorities responded by raising money from abroad to tide over the crisis.

What has complicated the matters this time around is a changing structure of the country’s trade deficit. Take for instance the scenario in the early 1990s. The economic climate in the country had worsened in the months leading up to the 1991 elections. The gulf war had led to a spike in oil prices, triggering a balance-of-payments crisis. The current account deficit had swelled up to 3 per cent of GDP in 1990-91. Financing was hard to come by. The country was forced to pledge its gold and borrow from the international monetary fund (IMF).

The 1998 elections were held against the backdrop of the East Asian crisis of 1997. India’s GDP growth had plummeted to 4.3 per cent in 1997-98 from 7.97 per cent the year before. With liquidity conditions tightening, as rating agencies had downgraded India, the government launched the Resurgent India Bonds, raising $4.2 billion and shoring up the country’s foreign exchange reserves. Two years later, when oil prices surged again and forex reserves dropped, the government followed it up with another bond offering – India Millennium Deposit.

The last general elections (2014) were also held under similar circumstances. The country’s economic growth had plummeted in previous years, with many alleging the government’s decision-making having come to a standstill. Oil prices had also surged during this period and gold imports had crossed $50 billion. As a result, the current account deficit had surged to 4.8 per cent of GDP in 2012-13. And, the ramifications of the infamous taper tantrum and India’s economy was in an extremely precarious position. This time, too, the authorities responded by raising money from abroad via the Foreign Currency Non Resident (Bank) Account deposits.

The forthcoming general elections (2019), less than six months away, will be held under similar circumstances. While growth has remained stable so far, the rupee has plunged to historic lows. Add to that the rising crude oil prices which threaten to wreak havoc on government finances — the situation is worrisome. With both oil and non-oil imports surging, many economists expect the current account deficit to touch 3 per cent this year. Financing this deficit is going to be problematic in the current global environment. And, while the option of raising money from abroad has been discussed this time around as well, no decision has been made so far.

One must also point out that the changing structure of the country’s current account deficit has complicated the policy response.

Until the middle of last decade, India’s merchandise deficit was largely due to the oil trade deficit shows data from the Reserve Bank of India (RBI). This meant that in 1991 the rise in the current account deficit was largely a function of higher oil prices.

However, from 2004-05 onwards, one observes a steady build-up in non-oil deficit. India’s non-oil trade deficit rose from $5.1 billion in 2004-05 to $90.8 billion in 2017-18, surpassing the oil deficit of $71.1 billion. Thus, in addition to the impact of higher oil prices on the current account deficit, the government also has to contend with the contribution of higher non-oil deficits.

Further, even within the non-oil deficit, there has been a significant change since 2013, complicating matters further.

In 2012-13, the gold and gold jewellery trade deficit was estimated at $40 billion by Kotak Institutional Equities. But gold imports, which had soared to $53.8 billion in 2012-13, declined to $28.8 billion in 2013-14, as authorities rolled out policies to restrict domestic gold demand.

This time, however, the gains on the gold trade deficit have been offset by the rise in deficit on electronic items and ores and minerals. Imports of electronic goods have surged to a record $51.5 billion in 2017-18, while coal imports have risen to $22.9 billion 2017-18. According to Kotak Institutional Equities, electronic items’ trade deficit has surged to $45 billion 2017-18, up from $36 billion in 2016-17, while the deficit in ores and minerals (largely due to coal imports) has surged to $28 billion in 2017-18, up from $18 billion the year before. This shift in the composition of the deficit complicates the policy response.

While restrictions on gold helped reduce the current account deficit last time around, it is difficult to expect a similar decline in the deficit on account of the import duty hikes on non-essential imports.