From stock market to critical reform bills: Why Bihar poll outcome holds the key

The elections of Bihar are important beyond the political equations that will get redrawn. Being a part of the famous cow belt, the state is important from the point of view of parties assessing their own strength in this critical political region. The overwhelming majority attained at the time of the Lok Sabha elections which was partly on account of the fragmented opposition would stand the test of a more cohesive counter-party.

In fact the loss in Delhi elections did question the supremacy of the NDA government; and the same was even called a referendum by political analysts. Hence, from the point of view of prestige, Bihar becomes important and a victory here would be a vindication of the right policies being pursued by the government at the centre. From an economic perspective the elections become important as they could be the guiding forces for what happens in the course of this year as well as the future.

The first economic implication is on the policy front. The NDA has come to power at the centre with a great majority. This was considered to be good news for the economy as having a single party in power would make decision taking that much easier. However, wherever legislative action is required it is necessary for the government to have an appropriate strength even in the Rajya Sabha. Not having the right number here with just 64 seats has made it difficult for the government to conceive a workable policy framework. It has already been observed that with just over 40 seats in the Lok Sabha, the Congress party was able to ensure that discussion never took place on certain important bills. It is hence more so important from the point of view of the NDA that the alliance scores a majority in the Rajya Sabha and a win in Bihar would add to its strength.

The NDA government has been proactive in getting through administrative reforms as well as policies that do not require legislative action. But for others acquiescence in both the houses would be required ultimately. GST for example would be very useful for companies operating in the country and be an efficiency booster. For a successful passage of this bill, the Bihar result hence becomes critical. In fact, looking at the other way, a loss in Bihar will be a victory for the opposition which can play realpolitik which will be retrogressive for the economy which is just about showing some signs of a revival. In fact, the pending land bill will see some more acceptance if the NDA comes to power as land is a contentious issue.

Second being a mineral rich state, there would be a lot of investor interest provided the right environment is created. It is here that a common party ruling at the centre and state would help to facilitate coordination. A lot of money (Rs 165,000 crore) has already been allocated for various infra projects including roads by the government earlier and for successful fruition, the same government phenomenon would be effective. Bihar today comes in the lowest grade of the ease of doing business in states report released sometime back in the ‘jumpstart needed category’ with a score of 16.4% compared with 71.1% for Gujarat thus ranking 21 out of 32 states and UTs.

Third, the stock markets will be watching the results closely. A victory would mean an upsurge in sentiment as it will reinforce the feeling that the progress of policies will be faster and it will be easier to push through reforms in future. A loss will severely dent the market as pessimism will replace the present skepticism. The stock market has been wobbly and is looking for some firm signal to push it forward.

Fourth, a victory for the NDA would also help the government in retaining fiscal prudence as a major goal. It may be recollected that the government for some reason had created an impression that it would be less inclined towards freebies and subsidies and hence was seen as being against social spending. This view was dispelled when the supplementary budget was passed which focused more on social sectors. The combination of these allocations with the higher flows from the centre to the state has ensured that social programmes of the government have not been pruned.

A loss in Bihar and its ramifications for the NDA would perforce compel higher spending on such programmes which can pressurise the deficit. It would perforce be compelled to be more flexible with its expenditure as it has to look at the future too. This would be inevitable especially so as there are other state elections coming up and the government cannot be seen as being anti-people. With Tamil Nadu, Kerala and West Bengal being the other larger states among others to have elections next year, where the NDA is already at a disadvantage as there are other parties that have the upper hand to begin with. Under these circumstances any roll back on such spending would be a big negative.

Therefore, the outcome of these elections would affect the future of the economic approach as they will have to be adapted to the emerging political reality. While it is not implied that a non-NDA regime cannot deliver adequately at the state level, such an outcome will certainly make things uncomfortable at the national level with the opposition gaining more confidence when it comes to getting approval. Therefore, purely from the economic standpoint, a NDA victory may be desirable.

The writer is chief Economist with CARE Ratings