Wednesday, December 18, 2013

Government elected in May 2014 will have just 90 days to get its act right.

With politics in election mode, there is uncertainty over short-term economic performance. But there is no guarantee we will have policy clarity even after the elections in April-May 2014. 

Even assuming we have a pro-growth, pro-reform government, the window of opportunity available to it will be open for a very short time: just 90 days. This is because governments in India have to be in election mode almost every other year. Remember UPA-2, which was re-elected with a better mandate in 2009? Within one year, it had lost its footing, and has never recovered from that. 

The government elected in May 2014 will have just 90 days to get its act right because the rating agencies will be holding a gun to its head. And it will have to act fast despite knowing that the outgoing UPA has booby-trapped the economy by legislating all kinds of bad laws. 

Both Moody’s and Standard & Poors (S&P) have warned of a rating downgrade once the next government comes to power. 

Moody's gave India a warning two weeks ago that if growth does not revive, inflation does not come down, and the fiscal deficit is not contained, India's sovereign credit rating will be downgraded. More specifically, it warned that the government should not be adopting policies that harm fiscal prospects or make banks run up more bad loans. 

Earlier, S&P said that it was holding back on a likely downgrade to see if the next government was able to come to grips with the country's economic problems. If it does not, India’s rating will move below BBB- the lowest investment-grade rating, below which Indian borrowings will be treated as junk. 


When a country's investment rating falls below BBB-, large foreign pension and mutual funds cannot invest in these markets, and lenders will start charging more from Indian borrowers. This will raise borrowing costs for everyone, and slow down growth further. What this boils down to is this: the next government will have to behave as though it is 1991 and act very fast. In its very first budget it will have to signal major economic liberalisation and big policy changes. This could mean freeing oil, gas and coal prices, opening up foreign investment in more areas, selling off majority stakes in government companies, and reducing government rules and regulations, among other things. If this is not done, a rating downgrade will be like a noose around the next government’s neck. 

Any government, whether it is one led by the BJP, the Congress or even a regional party, has to do everything in its first budget - which can be expected around July 2014. Otherwise, it will miss the bus. This is because even before it settles down, it will be up against the state assembly election cycle, making unpopular decisions impossible to implement. 

For example, soon after the Lok Sabha elections will come the Maharashtra assembly elections in October, where the BJP will find it difficult to win if the Thackeray cousins – Raj and Uddhav – are going to be fighting one another. The Jharkhand elections are also due in December 2014. In 2015, there will be the Bihar elections, where the BJP will be trying to oust Nitish Kumar. And so on. If the next government does not signal a dramatic enough change in economic policies in its first 90 days, the window of opportunity will close. 

No government today can hope to have a honeymoon period of more than six months to one year when the electorate will forgive tough decisions. This is why UPA-2 faced enormous problems after wasting its entire first year (2009-10) doing nothing. After that one scam after another was unearthed, and soon the government lost control of the economic agenda. 

Even in the 1990s, when PV Narasimha Rao and Manmohan Singh earned their reputations as reformers, the 1992 budget signalled the slowing of reforms. And after the Congress party faced state-level electoral reverses in 1993, reforms were brushed under the carpet. The moral of the story is simple: given India’s regular appointment with state-level elections, new governments at the centre have very little time to perform. If the big decisions are not taken in 90 days after a new government is formed, it will face the same troubles as UPA-2. Speed is the only way to reform and economic rejuvenation. With every passing year, public patience is shortening. Honeymoon periods for governments are shortening. 


Courtesy: http://www.moneycontrol.com/news/economy/new-govt-may-have-only-90-days-to-repair-economy_1008391.html


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