Election and economics

Amidst the dust and din of the great Indian general elections, the world’s largest democracy faces some key questions: what are the economic and market-related issues on which these elections are being fought? And how do various political parties plan to deal with these, based on their election manifestos? No, we aren’t focussing here on which political dispensation is better, rather, we are providing a bird’s eye view of current economic problems and what a given political entity plans to do with it.

We take up fiscal deficit, disinvestment and foreign direct investment for discussion.
Widening Fiscal Deficit

The Fiscal Responsibility and Budget Management (FRBM) Act requires that the fiscal deficit of the country be kept at less than 3 per cent of the GDP. When a government’s expenditure exceeds its revenues, fiscal deficit arises. So, in simple words, it is a measure as to whether a country is living within its means.

Decline in revenues in the form of tax collections and expenditures on various stimulus packages, lower excise duties and incentives to prop up the domestic economy are the chief reasons cited for our current fiscal deficit.

The fiscal deficit, according to official estimates, is expected to be 5.5 per cent. But it may shoot up to 11 per cent if state deficits and off balance sheet items (usually bonds issued to oil and fertiliser companies) are included.

This means that the government has to borrow more from the Reserve Bank or from the market to fund its projects. A higher fiscal deficit means less funds for investing in various sectors.

Countries around the world are running heavy deficits as the world economy slips into a prolonged slowdown. Economists argue that this may be the best way to come out of a recession. But there is a view that a high deficit may increase inflation as well.

While the manifestos of the BJP and the Congress do not get to specifics on this issue, the CPI(M)’s manifesto says it would scrap the FRBM Act itself and would raise the borrowing limits of State governments.
Disinvestment blues

Over the past decade, governments have sought to reduce their holding in several companies, making for higher private ownership. The process is expected to unlock government funds and reduce its role in running several behemoth organisations as well as a lot of small ones. The counter argument questions the logic of disinvesting from profitable PSUs, which are actually contributing to the government’s kitty. Here again, experts suggest that greater efficiency, transparency, quicker (autonomous) decision making and adaptability to changes are positives from disinvestment.

In addition to disinvestment in listed companies, the listing of several public sector companies such as NHPC, Coal India and BSNL is still awaited. Of course these offers will have to surmount the combination of bad market conditions and resistance from trade unions.

On these issues, again, the manifestos of the two leading national parties are mum. The CPI(M) and the CPI, however, have made it clear that there would be a complete halt to the disinvestment of profitable and potentially viable PSUs, if they are voted to power.
Foreign direct investment

There are several sectors that have a regulatory ceiling on the extent of foreign ownership in companies. Sectors such as Telecom (74 per cent) and Real-Estate (100 per cent, subject to certain criteria) have very high FDI limits, whereas sectors such as Insurance and media have a 26 per cent cap. There are demands for the cap to be increased to 49 per cent in these sectors.

Foreign investment paves the way for funding during times of a cash crunch or as with the current situation where domestic banks are hesitant to lend due to risk aversion. FDI also allows transfer of technology and expertise across borders.

But the counter argument is that it creates a non-level playing field between those able to access foreign funds and those that are not able to. Those who oppose FDI also point out the risks of allowing foreign investors’ participation in sectors of strategic or national importance.

The BJP’s manifesto, while remaining mum on FDI in other sectors, has made it clear that it would ban FDI in retail trade. The current norms allow for a 51 per cent foreign ownership subject to the retail format.

The argument here is that FDI in retail would destroy the livelihoods of millions of small vendors and ‘kirana’ stores. The CPI(M) has also indicated that it would scrap any FDI in retail, education, print and electronic media and banking.

In Insurance it has said that it would scrap any law to increase the existing FDI norms. It has also indicated that it would prevent any ‘backdoor’ entry of foreign investment. The Congress being the incumbent government has not mentioned FDI in its manifesto.
What does all this imply?

As young investors, it is important for you to understand that each of these issues has implications for different sectors and companies. A higher deficit would mean greater government borrowings, which could lead to higher inflation or interest rates. Disinvestment would affect all PSUs and especially those that are on the block. The fates of these stocks, therefore, may hang in balance till it becomes clear as to which political dispensation comes to power.

The story will be no different for the many cash-strapped companies that are awaiting a take on FDI relaxation in order to tap funds and bring in foreign partners.

So, even if you are not the kind that follows the bickering amongst different political parties, in the best interests of your investments, you must keep a tab on who wins!

via BL