Why UP results will make no difference to UPA and economy
No matter what the results in UP, it is unlikely to make a significant impact on UPA's ability to push through significant reforms.
The stock market has begun fretting about the post-poll Uttar Pradesh scenario – especially on how it will impact the central budget and the economy.
The bitter truth is that no matter what happens in Uttar Pradesh (or, for that matter in Punjab, Uttarakhand, Manipur, and Goa), the broader political realities won’t change much. In any case, the budget that Pranab Mukherjee has planned cannot be completely reformulated between 6 March and 16 March. At best he can add a few more promises.
Whether the market likes it or not, the reality is that the Congress party is focused on the 2014 election, and the UPA government is probably planning a minor fiscal consolidation this year and a major pre-election tsunami of giveaways in 2013.
Uttar Pradesh does not make any difference to this calculus – no matter what the outcome. However, it is still worth looking at the various possibilities to explain why this may be so.
Let’s start by assuming that the Congress will win Punjab and Uttarakhand, and lose Goa. Manipur does not count in the political sweepstakes. These four states can at best boost the Congress’ internal morale – they will do nothing to give it confidence about winning in 2014.
All eyes are, thus, really focused on Uttar Pradesh.
The question is: will a major gain for the Congress change its future or its attitude to economic reforms and light up business confidence?
The answer is no. Look at the scenarios.
Scenario 1 (likely): The Samajwadi Party (SP) gets a majority on its own, or comes close to a majority. This could lead to two possible outcomes: if it’s the former, the SP does not need the Congress. It will back the Central government on its own terms – in return for special economic favours. Mulayam Singh may not throw tantrums like Mamata Banerjee, but he is not going to be all sweetness and light either. If the SP hits a winning streak, it means the Congress starts on a weak wicket in 2014. That means it is not suddenly going to discover its reformist spine.
If, however, it is the latter scenario—where SP is the largest single party and needs 30-50 MLAs to form a government—it will surely need Congress support since Mayawati and the BJP are ruled out. This is what the market would be happy with since it could mean the SP will support Congress at the centre in return for support in the state.
The SP’s support will reduce the Congress’ dependence on Mamata Banerjee’s Trinamool Congress. If the SP is only marginally short of a majority, its first preference would be to garner breakaway MLAs from the other, weaker parties (BSP, BJP).
Either way, there is no major gain for the Congress which will alter its political calculations for 2014.
Scenario 2 (unlikely): Mayawati stays as the single-largest party, but is significantly short (50-60 seats) of a majority. This scenario is the most unstable of options, since the Bahujan Samaj Party (BSP) will either have to seek support from the Congress or the BJP to stay in power – assuming they have the relevant numbers.
The market will go into a tailspin since this could lead to instability both at the state and the centre – and Mayawati is not known to be a reliable partner to any party. A Maya-BJP combo would not be stable even in Uttar Pradesh, leading to the probability of a second Uttar Pradesh election in one or two years.
It is difficult to see how this unstable scenario is good for policy-making at the centre when the UPA has not shown any great enthusiasm for it when the going was good for it in 2009 soon after the electoral victory.
Scenario 3 (not unlikely): Both SP and BSP falter well short of a majority, and the Congress makes huge gains – going upto 80-100 seats. This is politically the best-case scenario for the markets, since this will give Congress the momentum for 2014, raising the possibility that it will win more Lok Sabha seats two years from now. Also, at the upper end of the 80-100 seats range, the party will be in a position to bargain for SP or BSP support at the centre and state from a position of strength – giving it more confidence to push some of the reforms through.
But there is one small problem: assuming that UP is going to be a game-changer for the Congress in 2014, the probability of the Congress wanting to take more risks on reforms will be lower. Given Sonia Gandhi’s risk-averse DNA, the chances are the Congress will try and build on its benevolent record and refrain from reforms – except for those of the most non-controversial kind. The party will not want to blot its copybook by taking up things on which the opposition or allies would unite.
Scenario 4 (less likely): In this scenario, the BJP does significantly better than the Congress, and becomes the clear No3 or even No 2 party. For the markets, and especially in the short-term, this is the worst-case scenario. Not only will it drive the Congress back into its shell, but it will start looking over its shoulder at the possibility of a BJP resurgence by 2014.
Scenario 5 (not improbable): A completely hung assembly—where no combo looks like it can form a stable government—is the last possibility. This is when there could be a possibility of president’s rule, for speaking about which Coal Minister Sriprakash Jaiswal was hauled over the coals. The various combos will then try to keep forming a government. It will be something like the Bhiar scenario post the 2005 election which gave no one a clear majority, and attempts by Nitish Kumar to cobble one together were stymied by the governor.
So, here’s the real bottomline: no matter what happens, Uttar Pradesh’s election will not make a huge difference to the Congress’ ability to push through good policies that are business-friendly.
The economic problems remain challenging: a soaring fiscal deficit, unreformed energy policies when oil may be about to spike once again, inflation far from tamed, and a subsidy bill that could bloat due to political uncertainties in the run up to 2014.
The market should not set great store by what happens in Uttar Pradesh on 6 March.
Sensex went up by 514.34 points to end at 59,005.27 while Nifty ended at 17,562.00 after a gain of 165.10 points.
Sensex fell by 524.96 points to end at 58,490.93 while Nifty ended at a loss of 188.25 points at 17,396.90.
The top gainers of BSE Sensex were Kotak Bank, HDFC Bank, Bharti Airtel, Maruti, and Nestle India. The biggest losers were Tata Steel, SBI, TCS, Hindustan Unilever, and Reliance