The post-election economy - light at the end of the tunnel?

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Keer | 13 Mar, 2014
As Bill Clinton said, "It's the economy, stupid". Many of those with their eyes upon the 2014 Indian election would agree. With the rupee hitting record lows last year, there are few who would argue that the economy should not be one of an incoming government's main priorities. However, none of the rhetoric and opinion circling the election appears particularly promising. There seems to be a prevailing economic gloom and a good deal of cynicism surrounding the country's finances. Despite the best efforts of Indian politicians, there is a general feeling that, whoever gets in, the economic tale will remain as depressing as ever. However, this may not quite be the case. The current government looks much as though it may lose the upcoming election -- and the likely format of a new government (rather than the particular parties or personages involved) could have a significant effect upon the Indian economic situation.

A Very Moody Outlook

The plunging value of the rupee has led to a great many concerns regarding the state of affairs in the Indian economy. Not least among these is the credibility crisis experienced and, according to some, brought on by the UPA. This has resulted in a lack of foreign investment interest and a lack of overall trust in the economy. Given that economies are built and toppled upon public and global perceptions of the strength and stability of economies, such a development is naturally devastating -- and has induced the current atmosphere of economic cynicism with which all economic electoral rhetoric is treated. Moody's Investors have released a statement glum enough to justify their name. Not only, claim Moody's, will a strong mandate have little to no effect upon the state of the Indian economy, a coalition of smaller parties will worsen the situation. "If a coalition of smaller, regional parties without a common economic reform agenda were to take the helm, it would likely provoke further capital flight, thereby increasing borrowing costs and weakening the Indian rupee, and delaying economic recovery", said a Moody's spokesperson. It seems that every outcome is bad, there is nothing to be done, and Indian investors must simply sit tight and wait for the economic slough to dry out.

The Situation Abroad

However, Moody's predictions may be somewhat short of the mark. While a strong mandate could conceivably bring about economic stalemate, and a fragmented mandate cause the credibility crisis to deepen, something in between could prove highly beneficial to the Indian economy. Such situations, in which one party is not quite powerful enough and must join forces with one or two other parties, have worked favourably in other countries. The UK, for example, is currently governed by a coalition formed of the Conservative party headed by Prime Minister David Cameron, and the Liberal Democrat party headed by Deputy Prime Minister Nick Clegg. This is the first coalition government to head Britain since the Second World War, and was formed when the lack of a sufficient mandate following the 2010 election meant that Cameron's Conservatives did not win enough seats in the House of Commons to take full power. On the face of it, the economic policies of the two parties in power would appear to have been too different to bring about any sort of coherent economic strategy.

This was a serious concern for British financiers -- especially given that the 2010 election came during a time of severe economic crisis worldwide which it was hoped that any new government would somewhat alleviate. Furthermore, some economists were worried that the coalition would prove unstable, thus putting off foreign investors, or that the lack of a clear mandate for any one party would reduce investor confidence in the nation and lower the UK's credit rating. However, as it happens, the period which Britain's coalition government has spent in power has seen a steadying improvement in the nation's fortunes. Economic recovery is progressing at a highly satisfactory pace. Significantly, mortgage rates in the UK have dropped to their lowest point in recent history. So marked is the economic growth that British finance sites like Money.co.uk are able to enthusiastically recommend a variety of loans to their readers, including "unsecured, personal, secured, consolidation or bad credit loans" - a situation which would have been unheard of in the British economic climate a mere few years ago.

Checks and Balances

The reasons for the coalition's economic success in Britain are manifold and sometimes elusive, but every indication is that a similar situation could also work in India's favour -- perhaps even more so, given the differences between economic regulation and legislation in Britain and India. A reasonable mandate allows the dominant party to exert a degree of control over the economy which is of great help when promoting investor confidence. However, coalition governments have the distinct advantage of being unlikely to see the dominant party abusing their economic power, due to the political and legislative check provided by their coalition partners. This promotes public confidence in the economy -- a driving force which propagates economic recovery from the bottom up. This latter is certainly the factor to which British Deputy Prime Minister Nick Clegg attributes the UK coalition's economic success. "It is my genuine belief", Mr Clegg has said, "that if we go back to the bad old days, not of coalition or balanced politics, but of either the left or the right dominating government on their own, you will get a recovery which is neither fair nor sustainable". He sees his party as ensuring that Conservative economic reforms have the best interest of all British people and business at heart -- and it's a tactic which, if the recent upturn in British economic fortunes is anything to go by -- appears to be working. Rather than the weak corporate environment, fragmented economic policy, and lack of investor trust predicted by Moody, India could therefore see a strong economic policy honed and tweaked through moderate coalition intervention brought to bear upon the Indian economy, strengthening it, shoring it up, and attracting foreign investment through the propagation of an attractive trading environment.