The Narendra Modi-led government has fought hard to create an image of it being against handouts.
The Bharatiya Janata Party’s (BJP) strong showing in the state elections has bolstered hopes of political stability at the Centre, alleviating investor concerns regarding political uncertainty in the months leading to the general elections next year, according to analysts, although some of them remain cautious about the potential impact of budget provisions on investor sentiment.
“While state elections have shown no correlation with Lok Sabha elections in the past, it nonetheless removes a key overhang of political uncertainty for the markets for the next five months,” said Gautam Duggad, head of institutional equities research at Motilal Oswal Financial Services.
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Investors were wary that a setback for the BJP in state elections could hurt fiscal discipline, prompting parties to implement populist measures ahead of general elections due by May. Investors are also watchful about the provisions of the interim budget to be presented by Finance Minister Nirmala Sitharaman on February 1.
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The BJP won three of the five states that went to elections recently. It won 163 seats in the 230-seat Madhya Pradesh assembly, 115 of 199 in Rajasthan, and 54 of 90 in Chhattisgarh, with the Congress emerging victorious in Telangana. In Mizoram, the Zoram People’s Movement clinched power with 27 of 40 seats.
A key feature at the state-level elections has been using so-called freebies to woo voters, with the BJP’s women-centric schemes seemingly playing a crucial role in Madhya Pradesh.
“The revdi (sweet distributed as a symbol of gratitude during festivities) culture has made a comeback – we expect the Centre to announce schemes in the run-up to the 2024 elections. State finances are set to come under stress amid populist schemes announced by the BJP as well as the Congress,” economists at Elara Capital said in a note on December 3.
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Despite the BJP’s extension of some populist schemes, such as the five-year continuation of the COVID-era Pradhan Mantri Garib Kalyan Anna Yojana free foodgrain initiative, analysts don’t expect the party to permit government employees to switch back to the old pension system that promises guaranteed returns, which is considered fiscally unsustainable by investors and economists.
Preserving fiscal prudence
The Narendra Modi government has projected an image of a business-friendly party opposed to populist handouts. While it does indulge in some such policies – free foodgrain to the poor and handouts to women, to name two – returning to the Old Pension Scheme (OPS) is not one of them. Elara Capital suggests that the BJP’s victory in Rajasthan and Chhattisgarh may result in a return to the New Pension Scheme, after the erstwhile Congress government in the two states had announced a shift back to the OPS and its guaranteed pensions.
A committee led by Finance Secretary TV Somanathan is currently looking into concerns raised on the matter after several states announced that they would be moving back to the old scheme.
The Modi government has insisted that its decision not to spend freely during the pandemic and instead focus on structural reforms ensured India’s finances stabilised quickly and the foundations for high and stable growth in the long term were set. With fiscal consolidation far from a done deal – the Centre’s deficit is expected to narrow to 5.9 percent of GDP this year with a medium-term target of 4.5 percent by 2025-26 – it seems unlikely that these targets would be risked when the interim budget is presented early next year, especially after such a resounding victory at the regional level.
“Investors were worried that a poor showing by BJP in state elections would increase the risk of more fiscal populism,” Nomura economists Sonal Varma and Aurodeep Nandi said.
“As such, the actual results should calm such fears, although a BJP victory across most states does not necessarily reduce the likelihood of competitive populism recurring as a dominant theme into the 2024 general elections, in our view,” they added.
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Reducing public debt and deficit ratios is key to further improving India’s macroeconomic fundamentals and getting a ratings upgrade, with the three global ratings agencies – S&P Global, Moody’s Investors Service, and Fitch Ratings – currently having India at the lowest investment-grade level.
Headwinds dissipating?
Economists said the BJP’s performance in the assembly polls has set the ground for a return to power at the central level, which bodes well for political stability.
“The elections for these states were keenly watched, given their geographic, demographic and economic importance. Together, these states account for 17 percent of India’s population, 15 percent of its GDP, and around 14 percent of the seats in the lower house of the parliament,” said Rahul Bajoria, managing director and head of EM Asia (ex-China) Economics at Barclays.
“The results may add to the perception of political stability in the medium term,” Bajoria added.
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Along with political stability, other factors also favour the Indian growth story.
“Geopolitical uncertainty is fading, and crude prices are off their September-October peaks. Fears of a hard landing in the US have also faded in the last few weeks,” analysts from Emkay Global Financial Services said in a December 4 note.