Business as usual: Bihar result may have no bearing on the economy after all; here's why

One thing that can be said with a fair degree of certainty is that the economic situation will not deteriorate on account of the Bihar elections result.

This is because of two reasons: For one, the economy is largely driven by private sector involvement which carries on independently of the government in power; secondly, the government at the Centre has done everything possible on the administrative side as well as through policies which can still largely go ahead irrespective of this outcome.

Easing doing business or doing something on power, coal, telecom, steel etc. would carry on in the normal course and these are issues that matter. The recent decision to reform the power sector relating to the distribution companies (Discoms) is an example of what the Centre can do without requiring taking the states along.

The stock market has, however, thought otherwise as witnessed by the decline in the indices on Monday – one day after the results were out. The market evidently views the Bihar election results negatively as it is felt that the reforms process would tend to slow down with a more accommodative approach being pursued by the government. There would probably be a turnaround in the Sensex subsequently as such reactions are not sustained and move on a daily basis based on fresh news and their impact on the market.

Where could there be a change in stance of the central government? Not really, as there is no pressure to rollback any policy as such. The policy framework is in place as is the expenditure plan as per the Budget which can carry on untouched by these results.

It has become a practice now that almost every central government would tend to allocate more resources for the state when there are Elections on. There could be additional funds being provided or a repackaging of what comes through the Finance Commission allocations.

There could be some switch from centrally sponsored schemes to states or in the reverse direction which would ensure that the political touch is added to a ‘normal’ activity. This happens before almost all state elections and hence would have been the course followed even if there was a victory in Bihar.

However, when it comes to core focus of government expenditure, it would be contingent on the perception of the outcomes of future state elections. The NDA would ideally like to be in power in almost all states, which holds for all parties.

But today with the NDA not having majority in the Rajya Sabha, any legislative action that requires acceptance in both the houses would be on the edge. Add to this the fact that the opposition would take the Bihar victory as a booster for them, there would be more pressure on programmes for social welfare, which at times could get populist.

An interesting conjecture is the future of GST or land reforms where the states need to be taken together. Here we have seen that while there are no serious objections from the states provided there is an acceptable compensation structure, this defeat may encourage the opposition to stall proceedings as well as make more demands with the Rajya Sabha making the difference.

This is a cross that has to be carried which can push back the implementation by some more time. But, is this a new development? Certainly not as this was already work in progress.

The same holds for land, where anyway the decision had to come from the state government whenever such an issue comes up. The Centre has already stated that the actual decisions and structures for compensation as well as the procedures would be left to the states to implement. Hence, practically speaking, it is not really a setback.

Where does this leave the economy then? The economy would move on as usual as the government would be even more determined to push things around. There would be a change in the social and political stance as it does appear that the decision at the ballot stations was influenced by these considerations.

A more focused approach on development would form the core of the agenda, because we are at a stage where foreign investors are also looking at developments closely. So far, it does appear that they have been positive about India and funds have been moving on the basis of economic factors. As long as the government does not do a turnaround, which is unlikely, this sentiment is likely to be maintained.

Introspection would definitely be more on the BJP’s review of what went wrong, and whether any of the perceived fundamentalist views or issues relating to religion or caste influenced the verdict. If they did, the approach and strategy has to change as the next four state government elections have not conventionally been their strong fields. This is the social side of the story.

On the political front, there would have to be realignments with other parties in states where the BJP is not strong as this would be the only way in which the electorate share can be increased. Such alliances invariably could mean acceptance of terms which could also spread to the economic domain.

Getting a stronger foothold in say West Bengal could mean some flexibility on land reforms and probably more focus on social welfare. Tamil Nadu could pop up other issues such as flow of funds. But then this is all politics for which all governments are prepared.

To sum up, we can divide issues into three buckets.

The first one comprises contentious issues like GST and land, where the opposition (this could be any set of parties) would always thwart for the sake of doing so. These will be a tough nut to crack.

Second, there are others which the government can do without looking beyond its own convictions, which probably matter the most, which is being done very well by the government and may be expected to prevail.

The third is having meaningful debate which can be thwarted by ‘noise’ in Parliament, which will get magnified to higher decibel levels on the back of the Bihar Elections outcome.

But, on the whole, this may not matter for an economy with a size of over $2 tn growing at 7.5% per annum.

The author is chief economist, CARE Ratings. Views are personal