12 March 2014, 02:41 PM IST
Many people think the prospect of a stable government post-elections drives up the Sensex. There are good reasons why India's short-term prospects are exceedingly bright regardless of the nature of the government.
India has had minority or coalition governments at the Centre since 1989, except for the latter half of Narasimha Rao's term, but grown and changed as never before under them.
The most unstable coalition was the United Front government over 1996-98. India had the fastest growth in the 1990s precisely during this period, when we saw compulsory dematerialisation of listed company shares, foreign institutional investor inflows into debt, sharp reduction in income-tax rates, a new exploration and licensing policy for hydrocarbons and many other reforms. Of course it helped that P Chidambaram was the UF finance minister.
Don't Blame Coalitions
In contrast, the 1980s had seen strong majorities for Indira Gandhi and Rajiv Gandhi. Rajiv Gandhi did manage to raise India's growth rate somewhat, but in an unsustainable fashion, with a huge rise in public and external debt.
UPA-I, too, was a coalition, hobbled, in addition, by outside support from the Left. Yet, India witnessed remarkable growth and strengthening of the founts of future growth, in terms of building human capacity and physical infrastructure.
Lesson: coalitions and minority governments are not necessarily bad for the economy, India's own history suggests just the opposite.
UPA-II's problems are best understood as growing-up pains of the polity, as it matures from a non-institutionally-funded, and therefore, corrupt democracy to one that uses the institutions of democracy themselves to check such corruption.
Since September 2012, the government has shaken off paralysis. The clearance process has been unclogged and public investment has gone up. But private sentiment will wait for the elections to be completed to revive. The new government will have political authority that had drained away from UPA-II. It can buildon what has been achieved and take fresh steps to inject new vigour into the system.
So Much to Build on
A goods and services tax is almost a done deal and can be realised fast.
Public sector monopoly in coal is the biggest binding constraint on the economy. Only renewed political authority is needed to scrap state monopoly in coal, break up Coal India into competing companies, auction off coal blocks to professional miners on terms similar to those used for oil and gas blocks, and build key rail links needed to bring coal from mines and ports.
Power lines have been drawn to 5.9 lakh villages. While 1,15,000 MW of generation capacity has been added since 2004, up to 50,000 MW of capacity lies idle, for want of fuel, creating bad loans for banks and depriving villages of power. Once coal is available and power is generated, the rural economy will be transformed.
Aadhaar and the ongoing rollout of optical fibre to 2,50,000 panchayats, in conjunction with rural power, will make possible financial inclusion as also huge efficiency gains in subsidy administration.
Rural Riches
Rural power will pave the way for climate-controlled warehouses. A warehouse regulator has been set up with statutory powers and warehouse receipts are now negotiable instruments that banks can discount for cash. These, along with a huge network of all-weather roads that has been built up, will boost farm incomes even further. Farmers will be able to use connectivity to access new markets and grow things that people need. Price, product and technology information will improve their bargaining power and income earning potential. A state-sponsored Small Farmers' Agribusiness Consortium helps farmers form companies and connect with markets.
When farmers step up production, food-driven urban inflation will come down. This, in turn, will allow the RBI to ease up on interest rates.
The good news does not stop here. Two developments will check the recent tendency for salaries to spiral out of control. The gross enrolment ratio for higher education has gone up from 11% in 2005-06 to 19.4% in 2010-11. A greater supply of graduates means a larger educated workforce. The framework of skills-training and certification according to standards and modules defined by industry-level groups, put in place by the National Skill Development Corporation and the All India Council of Technical Education, will ensure that a greater proportion of graduates are employable. This enhanced supply of employable workers will restrain wage inflation.
The corporation claims its efforts have trained one million people so far and that a million more can be trained every six months. Sheer propaganda? It turns out IL&FS Skill Development Corporation has made good money training and placing one lakh people just by itself.
So, short-term prospects are bright. Long-term prospects depend on political cohesion and what the electoral mandate does to that.
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