Interesting to see how the government balances its economic and political objectives.
The weaker-than-expected performance by the BJP in the recent state elections may possibly spur the government to focus on demand revival and structural reforms. The market, though, is already expecting a fiscal stimulus to consumption in the form of GST and individual income-tax rate cuts. It would be interesting to see how the government balances its economic and political objectives within the constraints of a stretched fiscal situation.
The BJP-Sena alliance won a simple majority in Maharashtra, winning 161 out of the 288 seats. However, the outcome was moderate for the alliance compared with the lofty projections of exit polls and its 185 seats in the 2014 elections.
Haryana elections resulted in a hung Assembly with no party being able to gain a simple majority; the BJP being the largest party got into an alliance to form the government. Both the state elections showed the challenges that the BJP is facing state levels despite its handsome win in the national elections.
Having said that, the party still holds considerable sway across large parts of the country. It would be interesting to see the government’s response to the weaker-than-expected performance in the two states after a thumping win in the national elections less than six months ago.
The state election outcome may push the government to double down on policy measures to address the ongoing economic slowdown. A slow election calendar ahead may give the government some breathing space. In the near term, the government may focus on demand recovery more than push investment-led economic recovery due to the electoral setback. This may, however, increase the risk of fiscal slippage.
The equity market has high expectations of a cut in individual income-tax and GST rates. Several consumer discretionary stocks have rallied on the back of rising expectations of a fiscal stimulus to consumption. It remains to be seen whether the government will further risk the fiscal position given the weak tax revenue collections so far and a likely hit it may take on account of the corporate tax cut. In the medium term though, the government appears keener to revive investment demand.
It may have to deliver follow-up reforms in areas of production and general governance. Though India’s ease of doing business ranking has improved, it lags in areas of contract enforcement, property registration, starting business and paying taxes.
Q2FY20 earnings have been better than expectations so far, with companies surprising positively on gross margins and taxes. Nonetheless, demand conditions remain quite weak with most companies guiding for weak demand conditions for another 6-12 months.
Source- Economic Times.