Coalition government in 2019: Boon or Bane for economy?

As PM Narendra Modi government’s five-year term nears its end, the focus has shifted to the high-octane 2019 Lok Sabha (LS) elections, which heralds a possible clash of coalitions. We opine on the impact of these possibilities on the economy.

Sep 01, 2018 05:09 IST India Infoline News Service

Voters
As PM Narendra Modi government’s five-year term nears its end, the focus has shifted to the high-octane 2019 Lok Sabha (LS) elections, which heralds a possible clash of coalitions.
 
The BJP in a robust blitzkrieg swept the 2014 polls, crossing the magical 272 mark in LS easily by winning 282 seats, while the National Democratic Alliance (NDA) clinched 336 of the lower house’s 543 seats. Congress, on the other hand, was almost decimated with a paltry win of 44 seats.
 
However, with anti-incumbency hitting the NDA right in the face, surveys examining the latest mood of the people indicate that despite Modi’s winsome attitude and popularity, the BJP won’t manage to repeat its stellar 2014 performance. However, the NDA will indeed return to power.
 
According to an India Today-Karvy Insights survey, the NDA will win 281 seats, 9 seats beyond the majority threshold of 272. Further, BJP’s majority will slide down to 245 seats, and UPA will be lagging behind with 122 seats.
 
Another survey by CSDS-Lokniti also claimed that if elections are held today, the NDA would win 274 seats.
 
However, with unemployment, price rise, and corruption plaguing the voters and Congress making efforts to consolidate a rag tag but unified opposition, BJP’s road to power could go awry.
 
In any case, the surveys are sure about one thing: the era of coalitions is all set to return.
 
So, should this be a cause of worry? Yes, given that critics argue that coalitions slow down economic growth mainly due to internal conflicts, instability, time-consuming decision-making, and uncompromising ideological gridlocks, among other things.
 
Yet, the fact is that our country is no stranger to coalition politics, which had become a trend over 1991-2014. Modi’s thumping victory did buck the trend to some extent, because although the NDA is a coalition, the balance is surely tipped in BJP’s favour as it enjoys a majority in the Parliament and can survive on its own if any coalition partner backs out. However, this is also complicated because BJP is not that powerful in many regional pockets like the south and north-east, where it has to take the crutch of regional parties to claim power.
 
Incidentally, Congress and BJP-led coalitions have been stable, lasting their full terms. What’s more, the non-BJP non-Congress National Front government led by HD Deve Gowda in 1996-98 is in fact remembered as the time when the markets outperformed and fundamental economic reforms were undertaken.
 
Even so, as the nature of politics has indeed undergone a sea of change, will a coalition government in 2019 mean doom for the Indian economy?
 
Possible scenarios for 2019
 
For 2019, the poll bugle has already been sounded, with PM Modi lambasting the possibility of a Congress-led Mahagathbandhan and instead expressing confidence that the saffron party will return with an impressive majority. As he rallies his forces, Congress president Rahul Gandhi has also expressed certainty that the BJP will witness defeat in the next LS elections.
 
Apart from the BJP and Congress led coalitions, another important factor in the entire matrix is the case of the fence-sitters such as UPA’s current allies TMC, AIUDF, SP, and CPI(M), BJP’s “outside supporters” such as BJD and AIADMK, and BJP-opposing parties such as BSP and INLD who could play an important role in case no single majority party is declared. Further, these fence sitters are tipped to win a whopping 140 seats, according to the India Today-Karvy Insights survey.
 
So, the 2019 election undoubtedly throws up the possibility of a coalition. Further, except Gowda’s 1996-98 third-front government and AB Vajpayee’s 1998 “rainbow” coalition, all coalitions have completed their full terms. Besides, various economic reform measures were passed during their rein. Let’s take a closer look at them. 
 
Previous coalitions and key reform measures
 
The 1991 Congress-led coalition, which received outside support from the Left, is notable for kicking off the country’s economic liberalization journey. Though PM Narasimha Rao’s minority government was pressured by the country’s economic situation – the government had to mortgage about 20 tonne of gold for $240mn just to keep the economy afloat – these path-breaking reforms opened the country to the global markets, allowing foreign participation to flow into equity markets for the first time.
 
The non-Congress non-BJP national front government was involved in various capital market reforms including dematerializing shares, beginning electronic trading, and allowing foreign investments in debt. It also allowed automatic FDI approval up to 74% in electricity and ports. Next, Vajpayee’s 13-month government and 1999-2004 coalition continued the delicensing regime, opening up FDI and expanding capital market reforms. 
 
The subsequent UPA governments of 2004 and 2009 continued to pursue important reforms, such as implementing the VAT system, SEZ Act, Direct Benefit Transfer method, hiking FDI limits, and disinvesting public sector units among other things.
 
Economic indicators under coalition governments
 
Apart from this, macro-economic indicators like current account deficit and GDP have remained more or less in a similar range during the pre-coalition and coalition era. In fact, the average growth is higher and more stable during times of coalition.
India Annual GDP Growth Rate
Current Account Deficit

 
What does this imply?
 
Considering the abovementioned aspects, a coalition government may have quite a few drawbacks, but it can also be argued that it is a tried and tested scheme in India. Besides, coalitions have advantages of greater representation and restraining the government from changing policy suddenly and randomly, permitting policy stability.
 
Even so, coalitions come with the risk of policy paralysis and subdued investor sentiment.
 
It is expected that the economy’s growth trajectories will remain largely unchanged following 2019’s mandate; a weak coalition will most certainly sway investor sentiment.
 
To conclude, the 2019 LS elections pitches two possible contests: Modi vs. the rest or UPA+ vs. NDA+. In both these scenarios, a coalition is inevitable. However, history shows that it is no reason to fret as coalitions have time and again proven their mettle in managing the economy.

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