How Volatile Political Environment Impacts Indian Businesses

The election period, given the length of the process, leads to speculation, contemplation and introspection. But, in most cases, decision making takes a back seat. Thus, a couple of months before the general elections, businesses begin to show the impact of an uncertain political environment.

Similar to what happens in other democracies across the world, each political party in India vied for attention by making promises of a new direction for the nation and aim for the new economic outcome. 

However, India is unique, given its high growth rate, size of the voting population, demographics and influence of religion on voting. Thus, from an investor perspective, the key monitorable will include:

The Election Result Itself

After the 2014 general elections, there was a belief that India found a government and a leader for the next decade or two, especially given that the winning party - the Bharatiya Janata Party (BJP) had an absolute majority.

However, the past five years have not been all easy. The performance of the Congress - the Opposition party - in state elections surprised many, and it felt like an indication of the things to come.
But, the Pulwama attack also had an influence. It has been a keenly-contested election where the voter turnout, which was better this election, could decide which way the pendulum swings. 

Two critical aspects of the election outcome will be:

  • Stability in leadership (i.e. Narendra Modi re-elected as the prime minister)
  • A single party at the centre or a coalition

National Security Threats and Risks

Post-Pulwama, there was a general belief that there could be immediate action against terrorists to heighten tensions for a brief period especially since a punitive action could significantly influence factors close to the elections.

However, with the announcement a day later, this risk seemed to have diminished. Nevertheless, especially after the recent events in Sri Lanka, national security will be a top priority for the government, and global investors will continue to monitor the tone at the top. Any indication of military retaliation can result in a swift outflow of foreign investments.

Corruption and Malfeasance

Corporate corruption and malfeasance have been a feature of the last five years especially since the introduction of the Insolvency and Bankruptcy Code (IBC). The government will be keen to demonstrate that IBC was not a one-time success and will aim for some big wins (including extraditions). While the impact of IBC has somewhat diminished in the recent past, we believe the code will get sharper teeth post-elections.

Also, with a focus on “Make in India” and “Ease of Doing Business”, the government will have to continue to demonstrate its intent to enable greater transparency and improved governance.

Jobs and Unrest

While job creation promises are on every party’s manifesto, this time, populism might play a part in the next few months, given the underwhelming position on employment numbers. The direct cash benefit scheme initiated for farmers is also likely to be executed aggressively. While subsidies have been controlled, pay-outs against election promises will put further pressure on the fiscal deficit.

Investment Activity

The period during the election is generally slow (and volatile for markets), and competitive populism means that decisions favouring corporate investments take a backseat till the second half of the year. However, given India’s growth trajectory independent of the government at the centre, we are likely to witness consistent growth. The role of the government would be to make the system more efficient and transparent, push for reforms to attract stable foreign inflow and promote domestic investments.

Banking Sector

Traditionally, capex and manufacturing growth in India have been funded by banks. While they have been in troubled waters in the past, the government has bailed them out through fresh capital.

This time, however, the scenario is different as the government is battling fiscal and revenue deficits, and does not have the means or the intent to capitalise on banks.

With shallow bond markets and foreign borrowing limitations, corporate India will have limited options to fund capex as and when they are ready. Further, with banks facing capital squeeze, recovery through a resolution of non-performing loans would be the best way to improve profitability.

This article was published on MoneyControl.com. 

 
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