The story of the Indian economy in 2014 could be played out in two acts. The event to divide the next year into two halves will be the result of the coming general election. The domestic economic situation is not a pretty picture: there is no growth recovery in sight even as consumer price inflation continues to hover around double digits. So there is little room for a stimulus to economic activity right now. The government can at best try to ease the economic situation through executive decisions to thaw large investment projects that have been frozen because of the regulatory climate. A lot depends on how the Congress party interprets the results of the recent state elections when it got trounced. One possibility is that the party may see voter dissatisfaction as a response to high inflation. Then there are good chances that its government will cooperate with the Indian central bank in keeping a lid on domestic demand, with a combination of higher interest rates and lower government spending. The other possibility is that the political leadership may see the loss of economic momentum as the major reason for the voter revolt, in which case it could be tempted to pour money into populist schemes that it believes could win votes. Global investors will not be impressed if India lets its fiscal deficit overshoot the budgeted target or allows inflation to further drift up. Nor will global credit agencies be cheering from the sidelines. The current confidence in the economic policy establishment that the worst is over could be severely tested in the middle of 2014, especially if the national elections throw up a confused mandate as well. That will be as far as the first half goes. What happens over the second half of 2014 will depend a lot on what the results of the national elections are. The new government will inherit an economic mess. It will have to set its fiscal house in order, keep its eye on inflation, rebuild confidence, push a new reforms agenda and get investment activity in the private sector off the track. It will not be an easy task—and much will depend on the nature of the mandate—who comes to power and what are the chances of the next coalition lasting the five-year course? That—is still a known unknown.

(Live Mint)