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! ©