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Posted on 14-Dec-2018 Comments  0

Assembly Elections

How the election outcome will set the tone for economic policy?

The state elections are done & dusted and it is time to move on. But this is not going to be that simple! It is hard to recollect the last time when the Congress managed a comprehensive 3-0 win over the BJP. The point gets all the more accentuated considering that 2 out of the 3 states were considered nearly redoubtable bastions of the BJP. But politics apart, the bigger question is what it means for economics? It would be naïve to believe that the outcome of these state polls would be forgotten any time soon. Between now and the general elections in 2019, these poll outcomes are likely to have 3 major implications for economic policy. 

Focus: Rural, rural, rural…

The one clear narrative of the state outcome has been that the government has ignored farm distress. Across the 3 states, the BJP lost the most votes in the agricultural belt. The loss becomes all the more pronounced when its vote share edge over the Congress fell from 8% to almost 0. One immediate result will be that the government will be a lot more liberal in waiving off farmer loans. In a tight liquidity situation, nothing works like waivers and more so in the case of farm distress. Expect generous write-offs for farmers notwithstanding its impact on the fiscal deficit. It is also likely to reverse some of the headway made in cleaning up bank balance sheets. That is likely to be first big take-away from the state elections.

Spend and inflate

What is the solution for jobs? The answer will be aggressive spending by the government. The Congress learnt these lessons in 2009 that spending on improving farm incomes can be a very smart political move. That lesson is unlikely to be lost on the ruling NDA. Expect a host of helicopter schemes to put more money into the hands of the people. More rural incomes will mean more purchasing power and that is likely to aid growth. Also expect some of the vulnerable sections like lower income groups, retirees and armed forces personnel to get a lot more freebies. All that will mean a greater burden on the fisc and FRBM could go for a toss. Above all, it could lead to a push to demand driven inflation.

Rush for resources

What one will see in the next few weeks is an aggressive push for resources. That will mean cross investment by PSUs to take over government stake. It will also mean generous dividends by PSUs and buybacks; at least by the profitable ones. Watch out for the RBI; where the government will be looking to raise resources. Be it in the form of a special dividend or a return of capital; the government is likely to stretch every revenue stream to the hilt. What happens to the health of PSUs remains to be seen! For now, the action shifts to state assembly poll outcomes! 

Change at RBI

Why the shift may actually be positive for the markets?

The day the former RBI governor, Dr. Urjit Patel, put in his papers it was expected that the markets would react negatively. Interestingly, on a day when the BJP fared poorly and the RBI saw a big change, the markets actually reacted positively. There is an eminent logic behind this. While we will leave the political debate aside for the time being, the shift at the RBI has been seen as a positive move. Here is why the markets are cheering the entry of Shaktikanta Das at the helm of RBI.

No economist; so what?

A senior economist in the Modi advisory team gave an interesting twist to the appointment of Shaktikanta Das. He opined that those who do not learn from history are condemned to repeat it. Hence, Das with his background in history would be eminently suited to the top job at the RBI. While the argument may be a tad rich and a little too obsequious, there is a larger reason why the markets are cheering Das. As a bureaucrat, Das has an in-depth understanding of the ropes of the government machinery. He is best positioned to move the wheels to get things done. Academicians at the helm of the RBI may bring a lot of technical finesse to the job but navigating the Indian system is a challenge in itself. That is where Das is likely to score over his predecessors. Also, as a bureaucrat, Das will ensure that frictions with the ministry are kept at the minimum.

A better communicator

One of the big expectations from the RBI governor is that of an effective and ready communicator. That is where the markets were having a problem with Dr. Urjit Patel. Things were just too shrouded in secrecy and the governor hardly offered any guidance on the trajectory of his thought process. A more transparent and communicative approach will work best. More so, considering that elections are round the corner and that means the pressure on the RBI will all the more. The role of the central bank is changing the world over and independence in the strict sense of the term is becoming increasingly elusive. In delicate roles like the RBI governor, there is a vast gap between resistance and resilience. Das has shown a lot more resilience in the past and that will stand him in good stead. 

Smooth tenure likely

What the markets are really betting on is that Das could mark a smooth relationship between the RBI and the Finance Ministry. That has not been seen since Dr. Reddy demitted office in 2007. A lot of financial decisions can become smoother if the RBI and the finance ministry are in sync. Good governance dictates that in any stiff debate between the two, the ministry must prevail. That is the way it is the world over. Das would be best suited to manage such contradictions!

Brent Crude

Why prices are not picking up despite supply cuts?


Source: IFC Markets

Exactly, a week after the OPEC and Russia announced a combined supply cut of 1.2 mn bpd, the price of Brent crude has hardly moved. Normally, such an aggressive cut should have led to a spurt in crude prices. What explains this anomaly?

All about slowdown worries…

One possible reason for this reaction could be that the markets are still skeptical about the impact of a global slowdown. The trade war between the US and China continues to flicker and that is not good news. Markets worry that if the trade war becomes a currency war then oil demand could be the worst hit. That is more so considering that the biggest demand for oil comes from Asian economies where the currencies are the most vulnerable. Normally, it has been seen in the past that when the global growth falters, then oil demand is the first casualty. If that were to happen then the demand supply equation may reverse.

About the influence of OPEC

There is a larger question that is at stake here. The market share of OPEC has fallen to below 40% for the first time in its history. It is only likely to get worse as the US, China and Canada are pumping oil at historically high levels. The cartel was successful in 2016 purely because of the support of Russia and Mexico. It is not too clear how long they will continue to support this supply cut move. In fact, if the prices don’t firm up quickly, it will be difficult for Saudi Arabia to sell the idea of supply cuts to Russia as well as to its own OPEC members. Indonesia left the OPEC in 2008 and Qatar has left the OPEC recently. If Iran and others do not see much value and influence in the OPEC, they may opt to walk out too. That will further reduce the influence of OPEC. The markets are worried that due to its falling influence, the OPEC cuts are unlikely to have a major impact on oil prices. At least, in the first week, that appears to be playing out!

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