Stockholm (Ekonamik) – India entered the crucial fourth round of its phased election Monday for 71 parliamentary seats across nine states, including West Bengal in eastern India, where clashes broke out between supporters of Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) and supporters of a regional party, Trinamool Congress, in the city of Asansol.
India’s election, in which 900 million people are expected to participate, is taking place over the course of six weeks and will conclude with the official declaration of results on May 23. Prior to the election, the National Democratic Alliance (NDA), led by the BJP, was expected to remain the biggest bloc in parliament. While the United Progressive Alliance (UPA) led by the Congress Party was relatively far behind as the election took off in April, and Mr Modi remains personally popular, not least due to a play on national security after he sent warplanes into Pakistan in late February in response to a suicide bomb in the disputed region of Kashmir, the main question was whether the NDA would win an outright majority.
Political uncertainty was heightened, however, by the government’s recent defeat in several state elections in December and the resignation of Reserve Bank of India governor Urjit Patel, although markets largely welcomed his replacement, Shaktikanta Das. Investors will be looking for signs that Mr Modi’s reform policies, such as the new bankruptcy code, reform of the goods and sales tax and implementation of direct benefits transfers, could be rolled back, either by failing to secure a majority or losing outright.
The electoral calculus may have changed again this week. West Bengal is crucial to Mr Modi’s re-election chances, where he hopes to gain seats up from the two of the 42 parliamentary seats the BJP holds in the state to offset possible losses in the north of the country. Other elections Monday were in Uttar Pradesh state in the north and Maharashta in the west, where Mumbai, the financial capital, is located. Uttar Pradesh and Maharashta are ruled by the BJP and elect the most MPs, but the party may struggle to hold its seats due to a jobs shortage and weak farm prices. Lacking infrastructure and ageing are concerns in Mumbai, which has six seats.
“Anything less than an outright win for Modi’s alliance could well roil the markets in the wake of the elections,” said Venkatesh Sanjeevi, Senior Investment Manager with Pictet Asset Management. But “India’s long-term outlook remains positive and good quality companies should continue to grow. That’s because most of the BJP’s reforms have become embedded deeply enough that they’re unlikely to be rolled back, even in the case of an upset win for the opposition Congress Party… [Modi’s reform] policies are all likely to stick.”
There are also mounting concerns of an economic slowdown due to tighter liquidity conditions and rising costs, which could put pressure on the rupee. “India is one of the best performing markets in Asia despite its vulnerability to oil price fluctuations and more indirectly, the US-dollar strength. It is also one of the most expensive markets and in the short-term, volatility will persist,” Aberdeen Asset Management’s Asian Equity Team wrote in January. An upset election could exacerbate such effects in the shorter term.
Still, the medium-term outlook remains positive, according to Aberdeen AM. “The country is well insulated from the ill-effects of global trade tensions. Structurally, its large domestic consumption-based economy is in a good position to withstand external shocks. Growth remains compelling, underpinned by a young population and an expanding middle class. Moreover, local macroeconomic issues appear to be abating, thanks to the recent dip in oil prices and a pause in U.S. rate hikes, as inflation remains benign,” they wrote.
The takeaway at this point in the election is that investors and markets prefer the stability a continuity of Mr Modi’s government would provide, and would want to avoid the short-term volatility a still unlikely upset loss would cause. A minority government may force medium-term uncertainty as the government fights to preserve its reforms, but Mr Modi’s coalition remains likely to win – though this is far from assured. It will take until May 23 to find out, but the beneficial factors driving India’s economy for the time being are likely to be able to weather a potential political storm. Whether or not Mr Modi’s brand of politics itself is good for India, however, is a different question.
Image: Arrival of Narendra Modi, Prime Minister of India (Wikimedia Commons)