Bihar poll results: Not just pollsters and politicians, even economists are keeping their fingers crossed

Not just political analysts, economy watchers in India and abroad too are keenly watching the outcome of the Bihar assembly polls, which will be announced on Sunday. Reason: Most economists expect the poll outcome to influence the future course of the NDA-government with respect to the economic and industrial reforms in the country. BJP’s weak position in Rajya Sabha has paved major hurdles for the party so far to push key reform bills, despite having clear majority in Lok Sabha. [caption id=“attachment_2493722” align=“alignleft” width=“380”]  (From left) RJD chief Lalu Prasad Yadav, Bihar Chief Minister Nitish Kumar and Prime Minister Narendra Modi. PTI[/caption] A clear picture has not emerged yet despite a plethora of exit polls as both the BJP and the Grand Alliance were shown running neck-and-neck with pollsters not too keen on risking their neck out on one with complete confidence. This uncertainty also reflected on the indices on Friday with the Sensex hitting a five-week low before recovering marginally. To be sure, even if the Bharatiya Janata Party (BJP) manages a victory in Bihar, this wouldn’t make any significant change in its numbers in the Upper House. But, a victory will offer the much needed impetus to the NDA-government to carry on with critical reforms, as it strives to improve its position in Rajya Sabha at least in the next two years. “Lack of majority in the former has stalled the reform process in recent parliamentary sittings. While a victory in this election alone will be insufficient to materially boost the government’s prospects (will take at least 2017-18 to gain a majority), but it is likely to provide sufficient momentum to jumpstart the reform process which has been moved to the back-burner since the unproductive monsoon parliamentary session in 3Q,” said Radhika Rao, economist, Group Research at Singapre-based DBS Bank. The Narendra Modi-government, which managed a landslide victory in the May 2014 Lok Sabha elections, has indeed managed to put the economy back on the reform track after a prolonged period of so-called policy paralysis during the UPA-regime, but has failed make progress on large-ticket reforms such as land acquisition on account of lack of strength in the Upper House. “Bihar polls are important politically as they are the first test of the ruling BJP in the Hindi heartland after the May 2014 general elections,” said economists at Bank of America Merrill Lynch in a report dated on 4 November. “While Bihar polls will not impact national politics as PM Modi commands a majority in the Lok Sabha, they will influence the market’s perception of reforms,” said the report. The report cites that it would be key to watch if the Modi-magic can still work in Bihar elections as it did in the May 2014 Lok Sabha polls. “The BJP had then swept all four major states – Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh. In Bihar and Uttar Pradesh, the BJP’s stellar performance was partly attributed to the divisiveness of the opposition parties,” the report said. “In Bihar, two key local leaders, Nitish Kumar and Lalu Prasad Yadav, have now joined hands. It remains to be seen if PM Modi can still win in the state.” Focus on future reforms Investors are eagerly looking at whether the Modi-government can continue with the reform path. Winning the Bihar battle will be major psychological booster to the NDA-leadership to carry on with the reform process, economists said. The Modi-government’s reform plan so far has focused on several small incremental steps, many of which have made notable progress. The government’s push on the financial inclusion front, creation of a social security network, roll out of direct benefit transfer and overhauling the financial sector structure, have been noted as critical progress in the overall reform agenda. The challenge for Modi is to take the process forward amid disruptions. In a recent report, Moody’s Analytics had warned that Modi will have to focus on the reform process keeping his party members under check (referring the inflammatory comments by BJP leaders on sensitive issues). The NDA government’s very ability to push critical reforms in the economy could also suffer (if) the debate turns away from economic policy in Parliament, the agency said. “Back to the fore will be the need to push key reforms, mainly concerning the factors of production – namely land acquisition, labour reforms and improving the business climate,” Rao of DBS said. “Attracting investments is also a priority through simpler foreign direct investment regime and iron out contentious issues regarding the public-private partnerships. Latter is particularly important for the infrastructure sector, especially roads and highways where many projects are stalled due to a combination of financing crunch, cost over-runs and tepid private sector participation,” she said. On Friday, speaking at the Delhi Economics Conclave, Modi said India’s economy looks much better now compared with the time he took over the office from UPA last year. “By almost every major economic indicator, India is doing much better, than we took office 17 months ago,” Modi said. Modi cited an improving GDP growth, low inflation, pick up in foreign investments, healthy fiscal deficit and lower interest rates. Modi is right. The economy looks in a much better shape than the UPA-days. While the NDA-government can certainly claim its due credit for pushing several development-oriented reforms, it should also thank the lower crude and commodity oil prices, which have helped to ease a significant part of the burden on India’s import bill and inflation worries. Also, the improvement in GDP growth is yet to reflect on corporate performance, bank credit growth and the stressed asset situation in the sector. Going ahead, Modi’s challenge is to restore investor confidence by pursuing the reform path, especially crucial reforms in land, labour and tax fronts. With the reform-progress in recent Parliament sittings not making any major progress, some of the business leaders had expressed doubts about the government’s ability to pull off the reform agenda. The BJP-leadership is left with little choice but to gain majority in the Upper House at least in the next two years if it needs to push large-ticket reform plans. The Bihar poll outcome will be keenly watched in this context. As DBS pointed out, if Modi-magic continues to work and BJP emerges victorious in Bihar that will offer more momentum to the government to make a stronger case for its pro-growth reform-agenda.