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The interim Budget was, as expected, a valediction for the United Progressive Alliance (UPA), rather than a document of great direct economic substance. It did have a few interesting details. One was the massive decentralisation. Central assistance to states will triple, while allocations for various central ministries have been cut by large amounts. Another action of interest was the excise cuts offered across a whole range of vehicles and consumer durables. Manufacturers are passing those cuts on in the hopes of generating some demand.
Beyond this, the Budget had the usual highly optimistic projections. At least one foreign fund manager said the numbers were wishful thinking and he would increase his short positions. The credit rating agencies would not really see a need to revisit their thoughts on India on the basis of the Vote-on-Account. If there is a messy coalition after the election, they could contemplate a downgrade of the sovereign rating to junk.
One piece of good news is that the January data show inflation is cooling off though it's still high in absolute terms. The differential between retail and wholesale price indices continues to be ridiculously wide, due to the varying weight of food in the two baskets.
The International Monetary Fund (IMF) wants the Reserve Bank of India (RBI) to continue with its high interest rate, tight-money policy despite the trend of slowing inflation. The IMF was probably wrong in offering that prescription to all and sundry after the Asian Flu but it could be right in the current instance.
The Indian central bank will have to defend the rupee until the US tapering is over. If the RBI cuts rates, the chances of a rupee depreciation would rise. The RBI also has to worry about rising non-performing assets in public sector undertaking-banks - so again, high rates and tight money may seem a reasonable approach.
The global economy is in the middle of a tectonic shift. China is trying to cool off a real-estate bubble and coping with a lot of bad debt within its banking and shadow-banking system. Japan is trying to push exports. Europe is recovering gradually. America is seeing a recovery where jobs are growing slower than gross domestic product.
There is a massive amount of political turmoil across multiple regions. Turkey, Ukraine and Venezuela are tinderboxes. The West Asia-North Africa region is unstable. Argentina is supposedly teetering on the edge of crisis. India and Indonesia are due for elections.
In the meantime, the US tapers and the Japanese continue an aggressive quantitative easing (QE) with the Bank of Japan (BoJ) having stated goals of pushing inflation up to two per cent and weakening the yen. This has had interesting consequences.
First, the Japanese QE did cause the yen to weaken sharply against most currencies as traders sold it short on the basis of BoJ's stated targets. Now some of those trades are unwinding, leading to a perhaps temporary, strengthening of the yen. This could cause a confusing counter-trend that might be worrying if it ties into weak data out of China. It might tempt traders to not only cover yen shorts but also to sell the yuan and move into the former. What will the BoJ do if the yen sees sustained appreciation?
Coming back to India, another piece of good news was that the 2G spectrum auctions have finally gone through with a fair amount of cash accruing to the government. This one-off windfall helps to shore up the fisc. For the telecom operators, the auctions should mean consolidation with chances of regaining some pricing power. It will add to their debt, however.
On the broader corporate front, it's apparent that exports have recovered much more strongly than domestic businesses. This pattern could continue for the next six months while India installs a new government of some description.
The 15th Lok Sabha was an absolute washout. The ruling UPA-II government made error upon error, of both omission and commission. The Opposition was consistently obstructive and refused to let legislation go through, forcing adjournments with continuous disruptions.
India has slid in all sorts of global rankings. It has dipped in the IFC's Ease of Doing Business rankings, in Transparency International's Corruption Perception Index, and in the Press Freedom Index. It has also, in dollar terms, seen the economy shrink in the past fiscal.
Given a well-known recency bias, where recent experiences have stronger emotional impact, no voter is likely to recall the UPA's halcyon days and vote for them out of nostalgia. Nevertheless, the current opinion polls suggest that the National Democratic Alliance will be considerably short of forming a stable government. It will need to induct allies and that might mean the usual horse-trading uncertainties.
Telangana and the voter responses to that could also seriously alter general election equations since erstwhile Andhra Pradesh had 42 seats. There is also the Kejirwal factor - the Aam Aadmi Party (AAP) chieftain has no compunctions about accusing all and sundry of being "rogues, rascals and freebooters". It is impossible to gauge how much resonance AAP has with the common voter nationally. But it could spoil many of the established assumptions if it does have traction outside Delhi.
Technically, the market looks as though it's likely to drift along with small upticks and downturns when there are news-based events. Retail seems to be mildly positive in attitude - this is probably due to the operators backing Narendra Modi. Foreign institutional investors seem to be mildly negative. Domestic institutions are mildly positive.
It is entirely likely that the next few months will see some extremely ugly campaigning in what promises to be one of the tightest elections ever. Until we see a verdict, nobody is likely to deploy very large sums into India.
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
