In a week, we will be getting to know who gets the people’s mandate to form the next government and the composition of the 16th Lok Sabha of India. The festival that is the Indian General Election will come to an end on 12th May and the results will be declared on 16th May 2014. In India, the outcome of these political turmoil will create a huge impact on the way business is carried out and the investment environment in general. Needless to say, these elections are followed enthusiastically by entrepreneurs and small business owners as well. Below are some excerpts from various articles that try to understand the impact of these elections on the startups in India and the investment environment in general.
Mint did an analysis on the relationship between elections and the economic climate across previous 30 years. Below are the few excerpts from the article in livemint which can be read here
“A study of key economic variables over the past 30 years shows that economic activity lost pace significantly every time there was a general election. Government spending went up in an average election year, which tended to fuel inflation rather than spur growth, suggesting that the extra public expenditure ahead of polls was largely wasteful.
The slowdown in investment and economic activity, however, is more pronounced this election season because the government failed to take policy decisions in the past couple of years while battling a raft of corruption charges….”
“New project additions dry up in an election year (see chart 2). Investors and businessmen postpone key decisions till a new government is formed, and wait to gauge what the future policy environment will be before launching major projects.
At the same time, the pace of industrial credit growth decelerates (see chart 3). Industrial credit growth slows down as there are fewer industrialists lining up for bank loans ahead of elections.”
The Center for Strategic and International Studies also carried an interview with Ms. Persis Khambatta, an expert in the field of US-India Policy Studies, who had this to say about the impact of Indian General Elections of 2014 on the Investments flow into India:
“In this 2014 election, it’s clear that India’s voters are calling for change. For decades they have cast ballots based on community identity, but this is changing in a dramatic way. New voters -including the young and newly middle class – are turning out to vote against corruption and, by all accounts, for good governance and economic development. While it is hard to predict how this trend will play out on a national scale, it does bode well for better governance, which ultimately bodes well for the economy.
At this point, the economy calls for strong leadership, and the most effective way to ensure that is through either party winning an outright majority, or through a firmly aligned coalition.”
— On asked how the results of election affect the investment climate
On asked “What policy initiatives and solutions can ensure the resumption of economic growth to at least 7%?”
“ Leadership. Whichever party or coalition comes to power in 2014, the economy needs decisive leadership. Certainty and predictability will boost sentiment and drive investment. 7% growth may still be a few years down the road; internal economic reform and institutional strengthening are both needed in order for India’s economy to grow sustainably for the next few decades. If the next government places an early focus on a few key economic measures both domestic and international investors would cheer.”
The complete interview can be read here (http://csis.org/publication/india-2014-elections-and-economy)
Meanwhile Credit Suisse has opined it to be unlikely that elections would kick-start an investment cycle in a short period of time. As per their reports…
“We disagree with the consensus view that elections can revive the investment cycle. Only a fourth of projects are stuck with the central government, and two-thirds of these are in power and steel, both wracked with massive overcapacity,”
However, their view for India is positive : “With better earnings revisions and growth than most other EMs, as well as declining inflation, India looks relatively more attractive than other emerging markets”