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April 26, 2009

How much will a Third Front govt. affect the economy?

Business Standard has a debate on this topic.

Amit Tandon, Managing Director of Fitch Ratings India, presents the optimistic view:

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.

Nirmal Jain, Chairman and Managing Director of India Infoline, is highly concerned about a fractured outcome:
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.

In another BS column, Akash Prakash of Amansa Capital, touches upon this topic from a stock market perspective:

Firstly we have the elections staring us in the face. By all accounts this is the most open election ever, with at least six leaders in the running to become PM. Nobody is quite sure how it will turn out, and as of today any of the three formations could come to power. I am not in the camp that politics do not matter. They may not have mattered when the world was growing at 4-5 per cent, and India had enough of a tailwind through heightened risk appetite and the benefits of past reforms to grow at 8 per cent-plus. However, they matter today, when the world is in the midst of a recession, we have structural fiscal issues and strong economic decision-making is the need of the hour.

India has enough policy-based low-hanging fruit, that its growth can be protected at a relatively high level. But will we get the policy reform? The only way that India can be re-rated upwards in terms of valuation multiples is if we get strong policy action. Depending on which formation comes to power, and who is the PM, there is no guarantee that we will get the dose of policy action that we need. There is not an insignificant probability that we get stuck with a very weak and ineffectual government that may not even last a full term. Such an outcome is a recipe for inaction and policy drift.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in