The Hindu Business Line : Changing priorities

THE outcome of the General Elections 2004 has taken most, if not all, by surprise. In the last few days the possibility of a hung Parliament was gaining ground. However, the magnitude of reversal of fortunes of the Congress alliance was unexpected.

How will the general election results impact the Indian economy? Will the priorities change? Undoubtedly, the economic priorities and the shape of the economic policy will depend on composition of the next government and its "collective approach".

The influence of the Left parties in determining economic policies will be another major factor. In general, the economic reform agenda of the Congress or the BJP, as given in their election manifestos, has been more or less on similar lines.

As the initiator of economic reforms in India, one would expect the Congress to accelerate them further. However, lack of clear majority on its own and compulsions of coalition politics may slow, but not scuttle, the pace of the reform process. Hence, stability of the new government and consistency of economic policies will remain a key determinant for business confidence in the economy.

With the economy on a recovery path and the level of business confidence quite high, the task for the new government would be somewhat easier. Building a consensus among the constituent parties in the government on certain major policy issues will take time, especially such sensitive issues as disinvestment, labour reforms, hiking the FDI limit in certain sectors will definitely require time before a consensus is arrived at among various parties.

One of the key issues in this election has been the plight of farmers. It is expected that certain populist measures benefiting farmers and efforts towards development of basic infrastructure benefiting the agriculture sector will be taken up by the new government.

Development of the social sector and emphasis on employment generation and promotion of small and medium enterprises are expected to be other priorities of the next government.

Some of the work done by NDA government in infrastructure development is expected to be continued further. Implementation of VAT, reforms in personal taxation, removal of certain exemptions both in direct as well as indirect taxes, pension reforms, etc. are areas where the ground work has to be taken further.

One of the key challenges for the new government would be tackling the impact of burgeoning crude oil prices on Indian economy.

Further, the new government will also need to look at improving the low FDI levels, India's FDI to GDP ratio compares unfavourably with other developing countries.

Going forward, fundamentals of Indian economy are expected to remain strong. The competitive advantages of India in the services sector is expected to lead its economic growth.

A stable coalition government led by Congress is expected to maintain the level of business confidence, which should keep the capital markets buoyant in the long term.

(The author is Rating Analyst, CARE Ratings, Mumbai.)