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Why stable government matters
In the run-up to the election results, the stock market rallied. On Friday, as the counting of votes in the mammoth Indian elections began, early leads were enough for the Sensex to jump over 1000 points to hit 25,000. This is on top of another 1420 points jump in the preceding one month. This is because of an anticipation of a stable government.
Here’s why this matters:
The Indian economy has slowed in the past few years. Growth in the economy – measured by the Gross Domestic Product – fell to 5%-levels from 9% earlier. A recovery needs strong measures by the government. “Meaningful reforms will be required to propel India’s GDP growth of 8% and beyond on a sustainable basis,” Kotak Securities said in a report. For this, a stable government is required.
Dependence on allies:
A stable government is one where a single party or a collective group of parties forms a government with a strong majority. This reduces its dependency on allies, especially when passing Bills in Parliament. The outgoing-UPA government was dependent on allies to pass reform measures. This led to many obstacles and many reforms were delayed or shelved. At a time when much depends on strong government policies, the stock markets were rooting for a stable government.
One of the key responsibilities of the new government is to cut down fiscal deficit – the amount by which a government’s expenditure exceeds its income. A high fiscal deficit is bad for the economy as it fuels inflation. Subsidies on fuel, fertilised, food and so on form a major chunk of the government’s spending. To control the fiscal deficit, the government cut its expenditure, especially productive spending like investment in new projects. Subsidies were more or less left untouched. This is a huge burden on the government’s finances. Moreover, lower productive spending added to the fall in investment and further led to a slowdown in growth. The market expects the new government to cut down on some subsidies and increase productive spending to fuel the economy. However, cutting subsidy burden is not a popular move. A majority Government will more likely address this than a Government dependant on allies.
Fiscal deficit can be controlled through an increase in revenue too. The stock market expects the new government to implement the goods and services tax (GST), which could led to a rise in revenue. This can also help the economy grow by 7%, faster than the current 5%.
A strong government is very important for investments in India. It holds the responsibility to make the investment climate more conducive. This has a direct bearing on the overall growth in the economy. It, thus, affects market sentiment. The new government is expected to clear the investment logjam. In 2013-14, public as well as private investments fell to 15% of the Gross Domestic Product (GDP) from 26.2% in 2008 due to slow decision making and policy uncertainty, according to CRISIL, a credit rating agency.
The National Stock Exchange’s 50-share benchmark Nifty gained nearly 1400 points or 23% to hit new lifetime highs since the time Narendra Modi was announced as the Bharatiya Janata Party’s Prime Ministerial candidate. This includes the 4% jump on the day of the election results.