Shashank Savla

Indian state election results increase populist tendencies

Shashank Savla

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India’s ruling party BJP (Bharatiya Janata Party) suffered a setback in the recent elections held in five states, sparking a renewed sell-off in the rupee and uncertainty ahead of national elections next year.


Of the three states previously held by the BJP, the opposition Congress Party emerged victorious in Chhattisgarh and Rajasthan,  and the state of Madhya Pradesh saw an almost even split with BJP winning 109 seats compared to 114 for the Congress, both parties falling short of the 116 required to secure a majority.


This might act as a timely wake-up call for Prime Minister Narendra Modi ahead of the national elections in the first half of 2019. While the state elections are generally fought on local issues and may not translate at the national level, the results do show a certain level of disenchantment amongst the populace, especially in rural areas. Falling food prices and rising costs have severely dented farm incomes and Modi’s promise of creating 20 million jobs per annum has yet to bear fruit. India’s real GDP growth has also slowed from 8.2% in Q2 to 7.1% in Q3 due to weaker consumption.


While we remain positive on the medium term growth outlook for India, we are concerned about the expensive valuations. India is the most expensive market in the Asian region and trades at a forward price-earnings multiple of 17.2x, a significant premium to the Asia Pacific ex-Japan region at 11.5x. This looks particularly steep given the uncertain backdrop for fiscal and monetary policy.


Since being elected, the Modi government has initiated several much needed reforms during its term. The Goods and Services Tax created a single nationwide tax replacing a plethora of state and central taxes, an Insolvency and Bankruptcy Code is aimed to reduce non-performing assets of the banking industry and a Monetary Policy Committee was created with a specific inflation target which has helped reduce CPI (consumer price index) inflation from over 6% in 2014 to 2.3% currently. These, and other reforms along with increasing transparency, helped improve India’s position in World Bank’s ‘ease of doing business’ rankings to 77 compared to 134 before Modi came to power.


However, recent actions – a partial reversal of oil deregulation and the spat with the Reserve Bank of India (RBI) – are a step backward. The latter led to the resignation of RBI Governor Urjit Patel earlier this week due to disagreements with the government on monetary policy, use of RBI’s funds and relaxing lending norms for banks. 


We expect the Modi government to resort to more populist policies in the run up to the national elections. Minimum support prices for agricultural produce have been raised by double digit levels this year compared to low single digits last year. A new RBI governor Shaktikanta Das, who is relatively dovish, was quickly appointed. While the looser monetary policy might support markets in the near term, we expect these policies to put additional pressure on the fiscal deficit and the rupee. The upcoming budget will be another opportunity to provide further sops.


Whether these measures turn the tide in Modi’s favour, or prove to be too little too late, is not clear. A loss for the BJP at the national elections will be quite negative for Indian market sentiment, as this will most likely result in an unstable weak coalition made up of disparate parties. 


We continue to monitor the developments in India closely but amid these risks, we currently see better opportunities in the rest of the Asian region.

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Thursday, December 13, 2018, 3:05 PM