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It would be an understatement to say the Indian economy is not exactly in a sweet spot at this moment.The rupee recently plunged to an all time low, GDP estimates have slipped, Inflation shows no sign of abating and IIP numbers remain uninspiring. Adding to this misery is the continuing probability of an economic downgrade by some prominent global rating agencies.
Yet, the bellwether BSE Sensex has done relatively well on an absolute basis for some while now. Those with a feel for the market-pulse would know that there are two reasons for this. One is the revival of FII flows( quality unknown ) in part, and the second is optimism in the belief that the BJPs Prime Ministerial candidate Narendra Modi will lead the NDA to enough seats to form a coalition Government post the 2014 general elections.
This optimism is also a reflection of the prevalent disillusionment with the Congress led UPA Government for having presided over what many market participants and some sections of the public at large consider to be India’s most corrupt and ineffective Government in recent times.
Assuming that the abovementioned scenario on the basis of which the market seems to be discounting itself right now plays out and a BJP led NDA Government holds the reins post the 2014 elections, will it lead to a dramatic reversal in India’s economic fortunes ?
The slew of pending economic legislations that have led to the infamous ‘Policy Paralysis’, for which the Opposition BJP led NDA too must take at least some part of the blame for their stonewalling tactics in Parliament over the last couple of years, could have far reaching adverse effects.
Only the politically naïve would believe that the Congress led UPA would not do unto the BJP led NDA what the latter did to it over the last couple of years in Parliament. This suggests that economic reforms that must get the Parliamentary nod will have to wait even longer.
Add to this the possibility of further Centre-State tussles over revenues and jurisdiction and the difficulties of pushing through the Mining Act and FDI in select sectors and several other such important issues, and the picture appears less rosy.
Furthermore, the large number of seats won by the debutant Aam Aadmi Party (AAP) in Delhi against all odds, suggests that though people may want change, it need not necessarily be a straight choice between the Congress and BJP.
In a three-cornered contest, quite often it’s the regional satrap that could emerge as the winner and to that extent a Third Front type of coalition post-poll formation could also materialize in 2014.
Historical evidence and conventional wisdom suggests that this will be viewed as a worst case scenario for the economy by market participants, but that by itself is not good enough to wish away such a scenario.
Ironically, the BSE Sensex has seen its best days under the stewardship of Finance Minister P.Chidambaram, who is widely perceived as being reform and market-friendly.
What will work for the next Government, whoever forms it, is the possibility of the economic cycle turning globally and in India during its tenure. Then, even a satisfactorily ( hoping for an outstanding one is utopian ) performing Government can ride that economic momentum and boost the economic indices. The markets as we know, will then need no further invitation, having waited as it for long to re-commence its ‘dances with the bulls’.
Either way, the next Government cannot afford, but to kick-start the investment cycle once again as a market index that stays afloat on the back of a consumption driven boom in a shrinking economy (suggestive of black money) is not a healthy sign.
2014 promises to be a year of change, both at the Centre and at the bourses. And if one had to look at what’s obviously positive – things cant get too much worse from here.
So, is it time to invest ? That question as any seasoned market participant will tell you has no meaningful answer. But yes, am a great believer in the old adage – in Adversity lies Opportunity
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Ashok Kumar is a Chartered Accountant and heads Lotus Knowlwealth, a Knowledge driven consulting company. He can be contacted at ceolotus@hotmail.com.
