A FRAGILE GOVERNMENT POSES A DANGER TO THE PROGRESS OF REFORMS

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After the 2024 elections, a potential fragile coalition government at the Center and the increasing cost of crude oil pose significant challenges to global financial markets. These markets are already grappling with unstable equities, less-than-impressive performance, and elevated interest rates, as noted by Morgan Stanley.

Economists from the foreign brokerage have expressed concerns that a weak coalition government might shift priorities towards redistributive policies, potentially diverting attention from capital expenditure and supply-side reforms.

Furthermore, if crude oil prices were to reach $110 per barrel, the Reserve Bank of India (RBI) could be compelled to resume interest rate hikes, which have been on hold for four monetary policy meetings. Although benchmark Brent crude is currently trading at around $86 per barrel, it briefly crossed the $95 mark last month due to supply constraints. For now, worries about weak global economic growth have helped keep prices in check.

In a report from September, Morgan Stanley had suggested that the Sensex could experience a significant swing, with potential gains of up to +5 percent or losses of as much as -40 percent, depending on the election outcome.

The report titled ‘One Billion Voters: Will they please the market?’ emphasized the crucial role of the elections in the short-term market outlook. If the I.N.D.I.A. alliance forms a viable pre-poll alliance, resulting in direct contests with the BJP-led NDA, it could dampen market optimism.

According to their most recent report, a $10 increase in oil prices could lead to a 50 basis point rise in inflation and a 30 basis point expansion in the current account balance. They also cautioned that sustained oil prices above $110 per barrel could destabilize India’s economy, causing domestic fuel prices to rise and triggering second-round inflationary effects. In such a scenario, they believe that currency depreciation pressures might increase, leading the Reserve Bank of India to restart its rate hike cycle.

On the other hand, a sustained oil price of around $95 per barrel would be more manageable for the Indian economy, and under such conditions, the RBI may not opt to raise interest rates.

Meanwhile, a recent report by the UNDP reveals that India has one of the highest income and wealth inequality rates globally. However, there has been some progress, with the share of the population living in multidimensional poverty decreasing from 25 to 15 percent between 2015-16 and 2019-21. The 2024 Asia-Pacific Human Development Report, released on Monday, paints a complex picture of long-term progress, persistent disparities, and widespread disruptions.

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