Market optimism driven by hopes of a BJP win, leading to a growth revival, has led to stock market exuberance with some rebound in cyclical stocks in banking, capital goods, realty and construction sectors.

The hypothesis is simple: Modi-led BJP-NDA will provide good governance and shake out policy paralysis, thereby stimulating investments, growth and employment.

But what’s the reference point? Maybe Gujarat’s superior growth and the undefined “Gujarat model” extending to the rest of India. The consensus also believes that the BJP will catalyse macro adjustments with fiscal rectitude, low inflation, correction in real estate prices and lower interest rates.

But is it so simple? A study of the BJP’s and Congress’ 2014 election manifestos indicates that these outcomes cannot be taken for granted. Outside of the criticism of policy paralysis, the outgoing UPA-II government is faulted for its overly socialist approach encompassing several dole-outs, which have become burdensome in the context of the dramatic decline in real GDP growth.

Policy paralysis is attributable to corruption charges linked to infrastructure projects of the high growth era of 2004-09 during UPA-I. The truth is that corruption increases during periods of high growth, if institutions do not cope up, giving room for crony capitalism.

But disregard for institutional reforms, political and administrative, predates both NDA (1999-2004) and UPA (2004-14) and currently pervades even non-Congress ruled states.

Who’s more populist

It is fair to be critical of populist interventions of the UPA that have created adverse terms of trade for productive sectors.

Aggressive support to real-estate activities, disproportionately large agriculture credit, higher rural wages and spiralling inflation have led to declining financial savings.

The tenfold rise in real estate prices in 2003 and the spill-over burden on PSU banks to fund social responsibilities, and the burgeoning fiscal deficit since 2007 are problems too. Looking at the election manifestos of BJP, it has in fact gone couple of steps further in competitive populism. For instance, apart from endorsing Congress’ main plank of food security, land acquisition, reinforcement of rural development, the BJP proposes a new beneficiary of “Neo-middle class” that will qualify for additional dole-outs.

Hence, BJP capitalises on the 140-million people who have moved out of poverty during the UPA rule.

Hard to yield to

BJP’s manifesto has put burning issues of inflation, unemployment, corruption and governance high on the agenda for immediate redress; not different from the Congress.

But its stance on food inflation is puzzling. While advocating setting up of courts to stop hoarding and black marketing, it also promises farmers a 50 per cent margin over cost of cultivation. An assured 50 per cent margin on farm produce is abnormally high for commodities.

Assuming that cultivation cost cannot be reduced meaningfully, the assured 50 per cent margin will have to come from higher procurement prices, aggressive government procurement and possibly large-scale exports.

BJP’s ambitious “Housing — no longer a mirage” programme, plans to roll out a massive low-cost housing programme. This stimulus for housing and real sectors will impart large impetus to land prices, labour cost and physical savings, thereby perpetuating the decline in financial savings.

So how will investments get stimulated? The BJP’s answer is “encourage savings as an important driver of investment and growth” and rationalisation of interest rates. But how can this be achieved with rising inflation, land prices, wage costs and declining financial savings?

We will need to see if improvement in governance and quick clearance as antidotes to policy inertia, alone can be sufficient to stimulate investments.

Overall, the BJP’s agenda does not reflect the sagacity of the NDA rule of 1999-2000, nor does it provide the same commitment towards fiscal rectitude.

If the BJP indeed forms the government, its policy framework needs to be more constructive than stated in its manifesto. But the moot question is whether it will have the political strength to act differently.

The writer is Head, Institutional Research, Economist and Strategist at Emkay Global Financial Services

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