Strategy - State of the Union: Cracks in Congress-DMK alliance

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n  Rift intensifies between Congress and DMK

Problems continue to mount for the Congress-led United Progressive Alliance (UPA) government. While the 2G spectrum issue and Supreme Court’s cancellation of appointment of the Chief Vigilance Commissioner (CVC) have dented the government’s image, the rift between the Congress and Dravida Munnetra Kazhagam (DMK) parties over the seat-sharing mechanism for the forthcoming state assembly polls in Tamil Nadu is jeopardising the government’s stability. DMK, which has been Congress’ strong ally for seven years and currently holds a significant 18 seats in the Lok Sabha, has threatened to pull out of the government. The latest round of talks between leaders of the two parties has not ended the stalemate.

n  Current constitution of Lok Sabha

Currently, UPA (along with the support of a few independents and some small political parties) is 274-member strong, which is more than 272 required to have a simple majority in a 543-member House. In addition, Samajwadi Party (SP), Bahujan Samaj Party (BSP), and Rashtriya Janata Dal (RJD), which together have 47 MPs, offered outside support to the UPA at the time of government formation. Meanwhile, the National Democratic Alliance (NDA), the primary opposition alliance with 159 seats, is led by the Bharatiya Janata Party (BJP).

n  Alternatives with UPA

·         UPA gets support from other parties: The SP (with 22 MPs) and RJD (with 4 MPs), which constitute the Fourth Front, may continue to extend outside support to UPA or may even form part of the government. Alternatively support can come from either BSP or AIADMK

·         DMK could still be a preferred ally: However, what is noteworthy is that as an ally, DMK is more stable and reliable compared to other regional parties such as BSP, AIADMK or even SP. Besides, the Congress is planning to go alone in Uttar Pradesh Assembly elections (due 2012) rather than aligning with any of the two regional parties—BSP or SP. Therefore, it is likely that the Congress may still prefer to salvage its alliance with DMK by yielding some ground in the seat-sharing mechanism

·         Opposition in disarray: Further, we doubt the possibility of opposition staking a claim to form the government. While the main opposition party, BJP, has been able to corner the government on various issues, we believe it currently lacks the ability to unite and lead the diverse array of political parties and present a credible alternative to the current government. Also, two of the key political parties—the Communist Party of India (CPI-M) (with 16 MPs) and Samajwadi Party (SP, with 22 MPs)—are ideologically opposed to BJP and, therefore, will not form government in coalition with it.

n  Conclusion

We believe the political environment will remain uncertain in the near term as various political parties shift positions in the run-up to assembly polls. This may keep financial markets volatile in the near term. However, medium-term performance of markets will still be shaped by the evolving macroeconomic outlook.