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The Economics of Politics: Battle of 2019

“A politician thinks of the next election. A statesman of the next generation.”
                                     James Freeman Clarke



Recent assembly elections result turned out to be mixed bag for both the major political parties. A party which was considered to have lost almost all political ground since 2014 elections, got a lot to be ebullient about in the aftermath of the results. For the ruling party at the center, whether it is a case of losing the battle to win the war will only be seen in 2019. However, the verdict of recent assembly elections once again proved that no party is invincible in the country’s demographic set up. The verdict has several political and economic implications and how it reflects in 2019 is important to analyze.

Assembly elections result has come out at an important juncture because the country is going to polls in approximately five-month time. Leaving aside politics, upcoming election in 2019 has far reaching economic implications. Due to slowing world economy, the entire world is looking towards India to take the center stage in terms of economic growth. This fact is reinforced by latest growth figures projected by various international financial institutions. Recently, IMF even remarked Indian economy to be an elephant starting to run. However, it all narrows down to how well the country can implement strategic economic reforms to meet the growth trajectory and expectation of people of the country. Previously, India has relaxed its foreign investment restrictions in some sectors, however, sustaining foreign direct investment and removing trade barriers will be more important in the future when the elephant will be gearing up for faster run. Though India is one of the world’s fastest growing economies, its per capita income is still about USD 2000 which is well below its peers from BRICS. For India to grow at its potential growth rate and, it is essential to have a stable government at the center to carry out the much-needed reforms.

In 2014, voters were swayed by the promise of good times as India faced rising fiscal deficit, slumping growth and soaring inflation and BJP riding on the anti-incumbency against Congress, carved out an opportunity for itself. Recent election result reimposes that disquiet is rising among the masses who decisively backed the ruling party and brought them into power. Any economic distress among farmers which account for nearly half of India’s working population will raise alarm bells for any political party. Ruling party’s leadership once believed that economic numbers will be in their favor when they go for the contest and bring them into power, but it seems that even economic growth numbers are below the potential of the country. Investment cycle is down with the crisis in the banking industry. Inflation which saw a double-digit number in the previous regime is under pressure to shoot up riding on the spending in election year. Lack of job creation is one more factor that may sway the voters away from the ruling party as predicted by the recent elections.

Source: www.imf.org

In run up to the final battle of 2019, recent assembly elections result is an introspection opportunity for the ruling party and a confidence booster for the opposition. From the results, it can surely be interpreted that battle of 2019 is going to be an interesting contest and to indicate the direct relationship between Elections and growth, economists even argue that a tough political contest leads to higher domestic spending and higher economic growth subsequently. Tough contest also means that Media, advertisement and political consulting sectors of the economy are going to see a rise in demand.

Irrespective of election results next year, Indian economy is expected to be frontrunner in terms of growth due to favorable macroeconomic data projection but after defeat in the assembly elections, BJP may not leave any stone unturned to come at the helm once again. Political uncertainty is expected to bring volatility in the stock market because of hopes and fears from new government. It is already up after assembly elections result because of the fear that government will now take populist measures such as waiving off farm loans. If the government goes to keep the fiscal prudence aside by going for farm loan waivers, it may cost the exchequer more than 2 lakh crore. After recent election results, probability for resorting to such measures has only increased.       

The result of state elections explains the rising worry among masses of being left out of economic growth visible from clear divide between rural and urban, rich and poor and ruling party may try to address the same in the last budget before the elections. There is also a rise in pessimism as reflected by RBI’s consumer confidence survey which clearly reflected in the results. Resorting to populist measures in the budget instead of carrying major economic reform at this point seems likely.  Recent election result is indicating to that because in Telangana populist measures taken by TRS brought them into power again. It will be doubtful though whether carrying out such measures will bring the same result at the center.

At the time when world favors an independent authority to carry out monetary policy functions, sudden resignation of the RBI governor, allegedly due to government’s continuous interference is a setback for the ruling party and a shot in the arm for the opposition. The government intended RBI to part with some of its reserves, so it could have helped the government to meet the fiscal deficit targets. Maintaining fiscal deficit is important for many reasons but a spat over the same with RBI governor eventually leading to his resignation could have been avoided at best. Considering all factors, how odds will play out in 2019 will be interesting to see. 

References

https://www.imf.org/en/News/Articles/2018/08/07/NA080818-India-Strong-Economy-Continues-to-Lead-Global-Growth

https://www.livemint.com/Politics/kc1fXtgkGRGU2pvlr29tdJ/Will-a-coalition-govt-in-Elections-2019-harm-Indian-economy.html

http://www.forbesindia.com/article/9th-anniversary-special/economic-factors-hold-key-to-modis-chances-in-2019/50211/1

https://carnegieendowment.org/2018/04/16/from-cakewalk-to-contest-india-s-2019-general-election-pub-76084

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