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India Strategy
Election Results: What Next?
What’s New? The Congress has won just one of the
five state elections. It is also not in a position to play a
role in government formation in Uttar Pradesh –
something the market widely hoped for as a key trigger
for policy action at the Center. What does this mean for
the market? Here are our key conclusions:
The continuing structural change of Indian politics:
There has been a subtle change in Indian politics over
the past five years. Throughout the 1990s and the first
part of the previous decade, being an incumbent
government seemed to be almost a guarantee of losing
elections. However, since end-2007, 2 out of 3
incumbent governments - which are arguably those that
have delivered a development agenda - have won
elections. The other change of the past five years is that
the electorate has delivered absolute majority for
several newly elected governments which allows the
incoming government to execute its agenda without the
stress of engaging in coalition politics. This theme
recurs in the ongoing state elections with clear
mandates in four out of five states though two out of the
five incumbents did lose (possibly a reflection of poor
performance).
Policy reform – is the glass half full or half empty?
The immediate consensus reaction is that these results
will trigger a wave of populism from the Congress
government at the center. However, that would be a
hasty conclusion given the country’s fiscal balance and
that general elections are another 24 months away. In
fact, we think that these results could trigger a concerted
effort to consolidate the fiscal deficit and raise growth
through development so that social spending becomes
more viable in 2013 ahead of the 2014 general elections.
Of course, there is a busy state election calendar but it is
unlikely that the Congress may spend resources at the
center to win these elections – it is not effective, in our
view. For one, most of these state elections are likely
only at the end of 2013. Two, state election results have
a different dynamic – the political agendas are local and
the constituencies are smaller and their results cannot
be extrapolated to the center.
Mid-term polls remain a tail risk: That said, we think the
probability is low. For example, would the BSP which just
suffered a big loss in the UP hesitate to support the Congress
at the center to prevent a Lok Sabha election in UP? BSP’s 21
seats in the Lok Sabha itself could secure stability of the central
government.
Market View: In the near term, the market is likely to be range
bound as it faces another couple of key events in the form of
the budget and the monetary policy in the coming days. We
think the Nifty may be coming to the end of its correction that
started at around 5600 save for adverse global events. The
key market indices have either registered or close to doing a
“golden cross” (see our note dated February 14 titled “Chart
Focus: The Golden Cross”). As we have seen in the past, the
golden cross has preceded changes in fundamentals.
Earnings revisions seem to have troughed, absolute valuations
seem fine and the market’s sentiment is not to discount a good
outcome but to anticipate a bad one. We remain focused on
stock picking as a strategy.
Upcoming Elections
Year State Elections
Scheduled Incumbent Party
2012 Himachal Pradesh BJP
2012 Gujarat BJP
2013 Meghalaya UDP
2013 Tripura CPI(M)
2013 Nagaland NPF
2013 Karnataka BJP
2013 Rajasthan Congress
2013 Delhi Congress
2013 Mizoram Congress
2013 Chhattisgarh BJP
2013 Madhya Pradesh BJP
2013 Jammu & Kashmir Nat. Conf.
2014 Andhra Pradesh Congress
2014 Orissa BJD + Allies
2014 Sikkim SDF
2014 General Elections Congress
Source: Election Commission of India, Morgan Stanley Research
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Strategy
Election Results: What Next?
What’s New? The Congress has won just one of the
five state elections. It is also not in a position to play a
role in government formation in Uttar Pradesh –
something the market widely hoped for as a key trigger
for policy action at the Center. What does this mean for
the market? Here are our key conclusions:
The continuing structural change of Indian politics:
There has been a subtle change in Indian politics over
the past five years. Throughout the 1990s and the first
part of the previous decade, being an incumbent
government seemed to be almost a guarantee of losing
elections. However, since end-2007, 2 out of 3
incumbent governments - which are arguably those that
have delivered a development agenda - have won
elections. The other change of the past five years is that
the electorate has delivered absolute majority for
several newly elected governments which allows the
incoming government to execute its agenda without the
stress of engaging in coalition politics. This theme
recurs in the ongoing state elections with clear
mandates in four out of five states though two out of the
five incumbents did lose (possibly a reflection of poor
performance).
Policy reform – is the glass half full or half empty?
The immediate consensus reaction is that these results
will trigger a wave of populism from the Congress
government at the center. However, that would be a
hasty conclusion given the country’s fiscal balance and
that general elections are another 24 months away. In
fact, we think that these results could trigger a concerted
effort to consolidate the fiscal deficit and raise growth
through development so that social spending becomes
more viable in 2013 ahead of the 2014 general elections.
Of course, there is a busy state election calendar but it is
unlikely that the Congress may spend resources at the
center to win these elections – it is not effective, in our
view. For one, most of these state elections are likely
only at the end of 2013. Two, state election results have
a different dynamic – the political agendas are local and
the constituencies are smaller and their results cannot
be extrapolated to the center.
Mid-term polls remain a tail risk: That said, we think the
probability is low. For example, would the BSP which just
suffered a big loss in the UP hesitate to support the Congress
at the center to prevent a Lok Sabha election in UP? BSP’s 21
seats in the Lok Sabha itself could secure stability of the central
government.
Market View: In the near term, the market is likely to be range
bound as it faces another couple of key events in the form of
the budget and the monetary policy in the coming days. We
think the Nifty may be coming to the end of its correction that
started at around 5600 save for adverse global events. The
key market indices have either registered or close to doing a
“golden cross” (see our note dated February 14 titled “Chart
Focus: The Golden Cross”). As we have seen in the past, the
golden cross has preceded changes in fundamentals.
Earnings revisions seem to have troughed, absolute valuations
seem fine and the market’s sentiment is not to discount a good
outcome but to anticipate a bad one. We remain focused on
stock picking as a strategy.
Upcoming Elections
Year State Elections
Scheduled Incumbent Party
2012 Himachal Pradesh BJP
2012 Gujarat BJP
2013 Meghalaya UDP
2013 Tripura CPI(M)
2013 Nagaland NPF
2013 Karnataka BJP
2013 Rajasthan Congress
2013 Delhi Congress
2013 Mizoram Congress
2013 Chhattisgarh BJP
2013 Madhya Pradesh BJP
2013 Jammu & Kashmir Nat. Conf.
2014 Andhra Pradesh Congress
2014 Orissa BJD + Allies
2014 Sikkim SDF
2014 General Elections Congress
Source: Election Commission of India, Morgan Stanley Research
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