By ousting the incumbent governments of three BJP ruled States of Rajasthan (which had been expected), M.P. and Chhattisgarh, the electorate has sent a message about some aspects of governance it dislikes. Should the electorate message be rightly understood, and acted upon, it would not greatly harm its prospects in the forthcoming general elections in 2019; else it will.

One of the messages is the angst of farmers who have, throughout India’s history, been given a raw deal. With 54 per cent of India’s population dependent on farming for its livelihood, but getting some 14 per cent of national income, the terms of trade are clearly adverse for them. Several governments have tried to take corrective steps, but these are not far or fast enough. Middlemen still get a larger share of the pie than they deserve to, which needs a swift correction. Governments have concentrated, with inverted priorities, on improving the inter-city road network (think Golden Quadrilateral connecting Delhi-Kolkata-Chennai-Mumbai) when the top priority should have been connecting villages to the ‘mandis’, or markets, in order to reduce the 30 per cent wastage in transit, due to poor roads, of fruits and vegetables.

A lot of sensible steps have been taken, such as soil quality certification to determine suitability for different crops, or direct benefit transfer for subsidies (most of which used to be earlier eaten away by middlemen), and others. These are the issues which ought to be speeded up.

Waiver round the corner

What is, however, likely to happen instead, is another farmer loan waiver scheme. This would be a reversion to populist politics, would enhance the moral hazard (farmers, even if able to service bank loans, do not do so, anticipating a loan waiver). So another farm waiver would create problems for banks, and add to the fiscal deficit. Should the fiscal deficit target not be met, foreign investors would react negatively.

The stock market, however, took the election results in its stride. After initially opening weak, following the resignation of RBI Governor Urjit Patel, it ended the day higher, after election results, and continued the upward trajectory subsequently.

What will determine the course of the stock market is the steps towards further economic reforms to strengthen the economy and provide jobs. Good governance will be the determining factor.

The feeble pursuit of white collar criminals, largely due to political compulsions, is a case in point.

Perhaps stern action on white collar crime would be a step that the ruling party would consider, post the five State elections.

The government has won a legal victory in the case of Vijay Mallya, when a British court ordered his extradition back to India.

Investors must now look at the US Fed meeting on December 15, where a rate hike is expected.

The number of expected rate hikes in 2019 will become important. Global debt has risen. Jim Rickards says that China debt has risen to $40 trillion from $2 trillion in 2000. Rising interest rates makes debt servicing difficult and, believes Rickards, can cause the next economic slowdown.

Indian markets have weathered the election results storm, indicating high expectations. A focus on economic reforms and good governance, would be the right course. Not on populist giveaways.

(The writer is India Head — Finance Asia/Haymarket. The views are personal.)

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