A government without the Congress or the BJP may not last, and may reverse policy. But investors will also keep in mind the economy's intrinsic strengths.
Managing Director, Fitch Ratings India
‘The pace of growth may vary, but a billion-plus people will always create their own forward- momentum — and that attracts investors’
Picture this. The election results are in and they show that both the Congress and the BJP as sitting in the opposition. There is no clarity on who the next Prime Minster will be — but as you would expect, there is a great deal of speculation. Like countless others, you will be on the phone, trying to guess what happens next. Given the outcome, you spend more time talking on the phone than you otherwise might. You receive and forward messages with the latest rumour — and then follow it up with a call.
The phone companies see a surge in talk time, and plan to spend on upgrading their infrastructure. They soon place orders with equipment suppliers, ask for more telecom towers to be installed, and before you know it, more steel is being produced, optic fibre lit, software programmers hired.
Indulge me a bit more. Attracted by the surge in talk-time in India, the chief executive of a telecom company in Germany decides that the company can no longer ignore the Indian market, and needs to have a foothold in India.
Its chief executive studies the Indian market, and a stream of consultants and vendors fly into India to evaluate the opportunity. These people fly into the country’s different telecom ‘circles’ and no doubt stay in hotels. They try to come to grips with how policy has evolved in the past. They study how CDMA operators rolled out their network, examine issues relating to the Access Deficit Charge (ADC) regime, look at the Tata’s microwave access fees controversy. They try to understand how spectrum will be allocated and the contours of the new 3G policy. They try and guess how their business plan might change as technology changes. They look at other sectors — airports, ports, the frequent changes at NHAI. Very little follows a beaten path. They huddle around a table and take a call — if Vodafone, NTT DoCoMo, Telenor and SingTel are here, there must be some way around the labyrinth. Importantly, 500 million addressable customers cannot be ignored. So they invest. Sensing higher competition, the existing telecom players decide to step up advertising-spends.
Seeing a higher advertising pie, five industrialists decide that they need to be in the newspaper business — a newspaper with influence is useful given the fractured polity; and three newspaper barons decide that they need to be in the new media, and invest in television. All of them also realise that content is critical and so decide that they need to be in the film business. Pretty soon, more newsprint and film stock is produced, more television sets sold, new DTH plans announced. This story continues to build.
Will a Third Front government spell economic disaster? Will steel plants shut in Jharkhand? Will companies stop making cars in Tamil Nadu? Will software no longer be written in Bangalore? Will ships not sail from Mumbai? Will doctors not operate? Will teachers not teach? Go back in time. Did FIIs not come back, after vowing to stay away from India, after we exploded a nuclear device? Did banks not shut shop in the 1990’s, only to line up on Mint Street, wanting to open branches again? The pace may vary, but a billion-plus people will always create their own forward-momentum.
Chairman and Managing Director, India Infoline
A Third Front government will not be good news for the market. No Third Front governments have completed their term in the past, and things could be worse this time. It will be an alliance of parties and people who are anything but like-minded, who have a proven track record of not being able to work together. In the formation of such governments, ministerial posts are never decided on merit. Each party that is a part of the government focuses on strengthening its electoral base and, if the opportunities exist, even its financial position. The current members of the Third Front have ideologies that are so different, it is difficult to see what the common minimum agenda will be. There is no hope of any forward-looking reforms or a consensus on contentious issues. The fact that there are about ten possible prime ministerial candidates reminds us of Ravana.
For a moment, let’s keep the stock market aside and concentrate on the macro-fundamentals. We run the risk of ineffective governance with continuous in-fighting, heightened corruption and significant retrograde steps on the social and foreign policy fronts. We have not forgotten Mandal and the mindless quota system that was introduced by a Third Front government, nor the recent events at Singur and the terrible waste of resources and opportunities that resulted. Given the problems in our neighbourhood, the last thing we need is a wobbly government at the centre.
Given the mess our public finances are already in, the problems on the economic front are likely to get more serious. The fiscal deficit, including that of the centre and the states — and taking into account the below-the-line items — is at a horrendously high 12-13 per cent. Although our savings levels are around 33-34 per cent of GDP, the fiscal deficit is a drag and is crowding out private investment. That, in turn, will slow the economy — a slowing economy and a little more profligacy will push the economy into a domestic debt trap.
We are passing through a massive global financial crisis. Under these circumstances, if the country’s financial management is in the hands of corrupt politicians who are in a hurry, it can cause grave damage to the economy. Worsening macro-fundamentals in a shaky global financial world will halt the flow of capital into India. What makes it worse is that we are competing with China where, thanks to continuing reforms and the government’s ability to execute its plans efficiently, the investor-environment is more favourable.
This lower flow of foreign capital will have an impact on the economy as well as on the stock markets. On the economy front, we badly need the flow of investments in infrastructure and industry to continue since this is what will help sustain growth and generate employment. For the stock markets, whether we like it or not, FIIs drive the sentiment and retail and domestic investors follow them.
Many political observers feel that if a Third Front government comes to power, it may not last for more than a year. Apart from the costs of holding another election, the greater burden on the exchequer will be the disruption and uncertainty in fiscal and economic policies.