Elections for seats in the Lok Sabha, the lower house of Parliament, will be held in April–May 2014. Regardless of which party wins, the result will usher in a new political era as Prime Minister Manmohan Singh will step down after a decade in power. He likely would have been out of a job anyway since the INC, the lead party in the minority UPA government, is headed for defeat.

Narendra Modi, the prime ministerial candidate of the Hindu-nationalist BJP, is expected to succeed Singh, assuming he can cobble together a majority coalition. Modi’s main liability is his association with the inter-communal conflict that occurred in Gujarat in 2002, but many voters are more interested in Modi’s economic record in the state. The promise that the improvements to infrastructure and welcoming attitude toward business that have fueled economic progress in Gujurat can be applied with equal success at the national level has helped Modi to attract support beyond the BJP’s traditional base.

Nevertheless, it is doubtful that the BJP is headed for a landslide victory. For many voters, local issues and interest-group politics play a bigger role in influencing their choices than national programs, a consideration that works to the advantage of regional, ethnic, and caste-based parties. Moreover, the strong showing of a new party, the AAP, at state elections in Delhi, suggests that the BJP and its allies in the umbrella NDA will face competition for the votes of disaffected UPA supporters.

Little in the way of evidence that suggests the economy is poised for a strong rebound.

Although it is unlikely that recent developments in Delhi, where the AAP and the INC teamed up to prevent the BJP’s return to power, might be repeated on a national scale, Modi will face a challenging process of coalition negotiations before he is sworn in as prime minister. As Singh and the INC learned, it is very difficult to sustain the unity of a coalition in which most of the junior partners care more about their parochial interests than implementing the national vision of the lead party in the government.

The interim budget for the fiscal year from April 1, 2014 to March 31, 2015, meanwhile, gives the incoming government something to work with and ensures spending plans are set out prior to the completion of the election process. The budget projects a lower fiscal deficit of 4.1 percent of GDP for 2014/2015, compared to an estimated shortfall amounting to 4.6 percent of GDP for 2013/2014, which seems ambitious as it presupposes successful privatization sales and real GDP growth accelerating to 5.2 percent.

Few major changes in taxation were contemplated (signaling an area that is likely to be revisited), but the reduction in factory-gate taxation from 12 percent to 10 percent on certain consumer and capital goods, and a reduction in the excise duty from 12 percent to 8 percent on specific road vehicles are positive indicators. With additional rural and banking-sector support, the interim budget is broadly positive from a business perspective, and has raised expectations of additional business-friendly moves when the normal comprehensive budget bill is issued in July.

The latest national accounts figures provide little in the way of evidence that suggests the economy is poised for a strong rebound, despite widespread confidence that the global economy in recovery mode. Although financial and business services maintained a high growth rate during the January–March 2014 quarter, agriculture and manufacturing, in particular, were weak links. Any acceleration in 2014/2015 will be relatively modest, with the government’s 5.2 percent forecast representing the upper end of realistic, and downside risks evident.


The PRS Group
About The Author The PRS Group
The PRS Group is a leading global provider of political and country risk analysis and forecasts, covering 140 countries. Based on proprietary, quantitative risk models, the firm's clientele includes financial institutions, multilateral agencies, and trans-national firms.


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