The outcome of a solitary state election cannot typically be treated as a key indicator that decides the national political trend. Hence, economists and investors are, often, not too bothered about state elections. But, that logic doesn't seem to apply for the Karnataka polls — the results of which are to be declared on Tuesday. Even as exit polls largely agree on a hung Assembly, economists from foreign institutions seem to be looking at it keenly as India's bellwether state election that will signal the course of national politics ahead.
"In the run-up, opinion polls point to a possible hung Assembly (in Karnataka). Although the ruling party enters the election on a weaker footing, ground sentiments suggest that the markets will view the results as a testament of the government's popularity in the midst of wider GST-led disruptions and asset market volatility," said Radhika Rao, India economist at Singapore-based DBS Bank, in a note.
But while the outcome of the Karnataka election remains important, what is important to note is that an element of political uncertainty is already building up in the country as DBS explains in its note. "The government faces rising political and economic headwinds in the run-up to the General Election. Apart from a lacklustre performance in two bypolls, a coalition partner withdrew from the ruling alliance and press reports suggest that the Opposition/regional parties have stepped up efforts to put up a more unified front at the 2019 General Election," the DBS note said.
These observations, however, don’t anywhere suggest a Narendra Modi defeat in 2019. On the contrary, investors have priced in a Modi victory in 2019, as noted by Swiss financial services firm, UBS based on investors' feedback. Certainly, Modi doesn't command the kind of confidence among investors he used to enjoy a while back. India Today, quoting a survey by LocalCircles, reported that anti-incumbency may be setting in against the NDA regime. "Fifty-seven percent of the respondents said that they were satisfied with the performance of the Modi government. In 2016, 64 percent had expressed satisfaction and 61 percent were happy with the Modi government last year," the report said, quoting the survey.
For investors, there were a few big factors that caused disappointments — beginning with the massive twin disruptions in the economy in the form of GST and demonetisation. These two, despite having certain positive benefits, disturbed the balance across sectors and pulled down an already slowing economy further. Business confidence also took a major hit due to a witch-hunt in the banking sector to unearth hidden non-performing assets (NPAs) and back-to-back investigations on high-value bank transactions.
Second, investors are also concerned about the ability of the government to absorb the shocks arising out of a sharp uptick in global crude oil prices that has benefitted the Modi regime. Crude is now trading at around $77 per barrel and is up around 15 percent per year to date. This will have implications on almost every key indicator in the economy as rising fuel prices will have a cascading impact across price verticals.
Third, another big concern could be a falling rupee. So far this year, the rupee has weakened over 5.1 percent, while foreign investors have bought $717 million and sold $2.87 billion in equity and debt markets, respectively, according to Bloomberg data. Further, global investors are also worried that Modi-government could fail to keep the promise on fiscal deficit target of 3.3 percent of GDP for FY19. The fiscal deficit has a bearing on the sovereign rating of a country as well as on the debt market. At the current oil prices, UBS has pegged India's current account deficit (CAD) at 2.5 percent of GDP in FY19.
But investors continue to back Modi also for the reason that there aren't credible alternatives.
The Congress, under Rahul Gandhi’s leadership, is yet to present itself as a strong-willed political party that has a vision to turn around the economy to next level of growth. The Congress' poll campaign still relies heavily on freebies (farm loan waivers) and other tried and tested tools of political populism. Modi, on the other hand, has taken a proactive approach to big ticket reforms despite poor implementation. Investors are thus left without much choice when thinking of the 2019 polls. On any given day, moneybags will prefer political and policy continuity.
In this backdrop, the DBS note added, "Markets are coming around to the view that the 2019 General Election might see the ruling coalition, National Democratic Alliance (NDA), stay in the lead but fall short of an absolute majority in the Lower House." Win or lose Karnataka, Modi will continue to remain the darling of investors, but with a less degree of the so-called Modi magic.
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Updated Date: May 14, 2018 17:02:13 IST