Year 2014 began on a sluggish note for the Indian stock markets. Both the BSE Sensex and the NSE Nifty tumbled 1.6 per cent each as there is a strong feeling among market participants that political parties may resort to populist measures in their election manifestos to attract voters. It is because of the recently-concluded State elections – and the stunning performance of the Aam Aadmi Party (AAP) in Delhi.

Free distribution of 700 litres of water per family and slashing of power tariffs were among the biggest planks of the AAP. Arvind Kejriwal-led AAP has also promised that electricity bills will be ‘reviewed by an independent agency’. Besides the anti-corruption sentiment, these promises propelled Arvind Kejriwal to the corridors of power in Delhi.

Investors worry that the Government will increase the social expenditure through populist measures at the cost of reforms, a scenario many of them, particularly foreign investors, do not want to see.

Another worry is the stand of various parties on key policy issues. Take, for instance, foreign direct investment in retail sector. The AAP’s rise in Delhi could create a roadblock for retail majors, which are looking to expand in India. AAP is against FDI in India’s retail sector. Since the new FDI policy on multi-brand retail has put the onus of permitting global retail companies to set up shop firmly on the State Governments, more States could join the anti-FDI bandwagon that will please millions of retail traders in India but unnerve the investor community.

Now, it is likely that both the Congress and the Bharatiya Janata Party, including other regional parties, will begin to root for more such populist schemes, similar to what has been seen in Delhi. In a democracy that is going into an election year, only politically correct reforms, such as the Food Security Bill, Rural Employment Guarantee Scheme and loan waiver schemes are likely to be undertaken.

These fears apart, the key question that reverberates in market circle is -- will the incumbent Congress-led UPA Government trap the next Government by announcing more fiscal resource-straining populist schemes and distort the economy or will it take a responsible call in the next few months by doing things that will put the economy back on the recovery path?

Though Prime Minister Manmohan Singh said his Government would continue to push economic reforms, create a favourable environment for foreign direct investment and work harder to generate more employment opportunities in the manufacturing sector, not many are taking him seriously on that count given his Government’s track record.

Sentiment on Dalal Street could get a boost from new reform announcements and longer-term growth-inducing policy initiatives. Those reforms will also provide downside support to India’s benchmark indices. One signal of the Government’s intention to ring in more reforms was when Oil Minister Veerappa Moily announced a sharp increase in the price of non-subsidised LPG to check the subsidy burden.

And if the Manmohan Singh Government walks the talk in this fashion, it could surprise the markets positively.

But will the developing situations allow his Government to pursue such reform agenda steadfastly?

(This article was published on January 5, 2014)
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