Political uncertainty and economic downturn
The economy has to once again perform under conditions of political uncertainty. The current political uncertainty is indeed a complex one. There is uncertainty as to whether the government in power could continue with its minority in parliament.

May be it could. Neither the main opposition party nor its erstwhile coalition partner, the JVP appears to be keen to topple the government for its own reasons of power politics. There is also the possibility of the government continuing without a parliamentary majority owing to the Presidential form of government.

The Executive Presidency could continue with a minority in parliament till the next budget or a financial bill of significance. So the present government may continue with whatever uncertain conditions that may surround it. The country may have to endure a period of political uncertainty and instability with a shaky government that may be induced to follow economic policies that appease sections of parliament that support it from time to time.

Whatever be the political tremors, there is little doubt that the period before the next Presidential election would be one of enormous uncertainty and anxiety. The dimensions of uncertainty are not limited to political developments, but could also have serious ramifications for economic policy, investment and economic growth.

A government intent on remaining in power may compromise with certain opposition parties on economic policy measures, as well as other policies that would have an adverse impact on the economy. It is also likely that a shaky government would give in to trade union and other political pressures and take decisions that would have undesirable consequences on the economy.

Demands for higher wages, recruitment of unwanted employees into government or public corporations, expenditure that are politically beneficial and economically detrimental are very much on the cards in a scenario of political bargaining. Fiscal profligacy is on the cards in this context.

With the budget deficit already reaching towards 9 per cent of GDP owing to increased welfare expenditure and salaries, additional expenditures could increase the budget deficit to an extent that destabilises the economy further.

This means that the inflationary pressures would be high. The recent Central Bank measures to raise interest rates are a policy response to contain the adverse effects of the government's fiscal over-spending.
The rise in interest rates in turn could have adverse effects on investment and corporate performance. Fiscal extravagance in a context of an inflation induced by high import costs could lead to runaway inflation.

The business community is still ambivalent in their response to the political developments. One school of thought is that whatever happens there would be possibilities for investment and that a change of government may usher in a better period for investment and economic growth.

The ambivalence of the business community is reflected in the behaviour on the stock market, rising prices and lower turnover. The significance of the Presidential election in bringing a semblance of stability is recognised by all parties. But when will that be?

The direct election of the Executive President is the event of political significance in a constitution that hardly provides a possibility of a parliamentary majority by a single political party. Yet, the timing of the Presidential election itself is quite uncertain and a matter of serious controversy. Is it this year or in 2006? This ambiguity could be another factor in destabilising the state of political affairs that is already riddled with enough controversy.

Expecting a climate of political certainty is indeed a flight of fancy in the current context. Business enterprise would require developing an adroitness and resilience to cope with political uncertainty.

Unfortunately, as we have pointed out, the political uncertainty generates adverse macro economic conditions that undermine economic activity. These are difficult, if not impossible to circumvent. These adverse economic fundamentals would affect economic growth in diverse ways, rising prices, depreciation of the currency, high taxation, strikes, and detrimental changes in economic and financial policies.

The economic reforms that were on the cards would be postponed in this context, while other institutional changes that would affect the economy adversely in the long run may be implemented.

The political context in which the economy has to operate is undoubtedly the biggest constraint to economic growth. The dream of higher economic growth and resolution of economic and social problems will continue to be deferred, until the political and constitutional conditions are changed by either consensual politics or constitutional change. Both these also appear pipe dreams.

The economy can hardly be expected to perform at its full potential in this environment. Nevertheless in the intervening time the unstable and uncertain environment has to be accepted and the economy must perform to its best under such conditions.

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