India is in desperate need of reforms.
With economic growth at a 10-year low, the rupee down over 12% year-to-date against the dollar, capital outflows, and collapsing corporate profits, it’s no surprise that biggest story in India over the next year are the May 2014 elections.
Unfortunately, the government isn’t expected to pass any major reforms between now and May 2014, and risk voter wrath.
What’s worse, it’s looking less likely that the incoming government will have the clear majority needed to pass any drastic, growth-stimulating reforms.
The latest opinion polls show the Congress party (which is largely expected to push populist measures) and the Bharatiya Janata Party (BJP – which is fiscally conservative and focused on a development agenda) losing ground to a “third-front coalition.”
The third-front refers to regional parties, that are now expected to win nearly 50% of seats in parliament. India holds general elections every five years, so, if elected, this third-front could stay in power till 2019. The president can however dissolve the lower house of parliament in extreme circumstances and call for general elections before the five-years are up.
The rise of the third front is bad news because the smaller parties have their own agendas and are likely to push for reforms centered on certain regions or communities, and are “unlikely to have strong national policies,” argues CLSA analyst Mahesh Nandurkar.
“We see the chances of a weak leadership largely made up of regional parties – each with their own agenda and incapable of pursuing the bold reforms needed to kick-start India’s economy – as the most probable scenario,” writes Nandurkar. “This would usher in a period of prolonged weak and patchy policy making.”
And the make-up of the government is likely to moves markets. From Nandurkar:
“Market reaction to electoral results can be strong and immediate. Following 2009 election results, the market moved rallied 17% over two days as the ruling Congress won a stronger-than-expected mandate. After the 2004 result, the market dropped 17% in two days as the right wing BJP lost unexpectedly and a Congress coalition, supported by left-wing parties, came to power. In both cases, Congress won the elections.”
Nandurkar expects a third-front coalition to claim 200 – 250 seats. He expects both the BJP and Congress to “woo” the regional parties and form alliances.
Of course political alliances are prone to change and the results of the upcoming state elections in November and December will also weigh on the 2104 elections. Moreover, there are 70 million new voters, or 10% of the electorate, that will take part in the 2014 elections and this could also impact the outcome.
Earlier this year, the Financial Times reported that in a “confidential note” the IMF was forced to make “a humbling series of U-turns over its global economic assessment.”At a time when growth in developed markets is just beginning to return, emerging markets have failed be the engine of growth that the world had come to expect.
This is obviously key for foreign investors and businesses looking to make a footprint in India.