The Indian market is yet to price in what could be a ‘political storm’ in the run-up to the general elections next year as the opposition seeks to regain lost ground.
That’s the word from Japanese financial major Nomura which expects a “grand coalition" of opposition parties to take on the might of the ruling Bharatiya Janata Party.
Political uncertainty and noise is only set to rise in the next year and some consideration needs to be assigned to the opposition parties performing better than in 2014.Nomura report
After its surprise victory in assembly elections in three north-eastern states, the BJP lost two by-polls in Uttar Pradesh despite running a majority government in India’s most populous state for nearly a year. More recently, its key ally Telugu Desam Party quit the National Democratic Alliance and partnered with its rival in Andhra Pradesh, the YSR Congress, to demand a no-confidence motion against the government’s failure to give ‘special category’ status to Andhra Pradesh.
India’s benchmark, the BSE S&P Sensex fell more than 700 points in next three days after the TDP quit the coalition at the Centre, before paring some losses.
Bypolls in Uttar Pradesh and Maharashtra – dates for which have not yet been announced – will be key in determining whether these risks rise or fall, Nomura said, adding that “the focus on risk will incrementally shift away from economics towards politics.
Nomura did not rule out the likelihood of early elections, assigning a 25 percent probability that the Lok Sabha polls are held in the last quarter of the financial year 2017-18 instead of the scheduled May 2019. If that happens, the general elections would coincide with state elections in Chhattisgarh, Rajasthan, and Madhya Pradesh. And that will give the BJP an advantage “in ease of campaigning and subduing anti-incumbency in states like Rajasthan,” the financial major said.
Slower Pace Of Reforms
The pace of reforms will slow down ahead of the general elections and “restrained populism” will likely take over, according to Nomura. “After four years of prudence, we believe a populist overtone in policy is likely as the government raises its pro-farmer, pro-common man profile,” Sonal Varma and Aurodeep Nandi, analysts at Nomura Financial Advisory & Securities (India) Pvt, said in the report.
Despite the possible rise of populism, Nomura expects the Centre to adhere to its 3.3 percent fiscal deficit target in 2019 but cautioned that fiscal risks may materialise on account of bank recapitalisation and farm loan waivers announced by several states.
Greater capital requirements for the bank recap process and loan waivers announced by states suggest that fiscal risks may materialise in the form of an increased debt burden and higher general government (Centre + state) fiscal deficit.Nomura Report
(This story was first published on BloombergQuint)
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