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India election: An emphatic vote of confidence for Modi

In the recent Indian election, Prime Minister Modi cemented his position as the most dominant and influential politician in Indian politics. Bharatiya Janata Party (BJP) scored an emphatic victory in India’s most populous and politically important state of Uttar Pradesh, capturing over 80% of the seats. BJP also gained a majority in Uttarakhand and captured seats in Manipur. Indian National Congress (INC) gained a majority in Punjab, but failed to do so in Goa. The implications are first, it is an endorsement of Modi’s demonetisation and the broader pro-poor and pro-reform policies; second, it puts Modi as the front runner for the 2019 federal elections and hopes of continued reforms, albeit incremental rather than dramatic to date; and third, is supportive for Indian rupee assets aided by improving macrofundamentals.

In March 2017, the Election Committee announced the results for five state elections: for Uttar Pradesh (403 seats), Punjab (117 seats), Uttarakhand (70 seats), Manipur (60 seats), and Goa (40 seats). It involved an estimated 160 million people. The five states make up 690 out of a total of 4,120 state assembly seats (17%). In terms of their relative importance for the two houses of the federal parliament, they comprise 102 out of 545 Lower House seats (19%), and 43 out of 245 Upper House seats (18%). The most important is Uttar Pradesh, India’s most populous and politically important state. It comprises nearly 200 million people or 16% of India’s population of 1.2 billion, 80 Lower House seats (15%), and 31 Upper House seats (13%).

Prime Minister Narendra Modi’s BJP scored a historic landslide victory in Uttar Pradesh. It won 312 of the 403 seats and along with its coalition partners, the National Democratic Alliance (NDA), captured 325 seats or over 80% of the seats. This is unambiguously a decisive victory and represents a marked turnaround from only 48 seats won in 2012 (Table 1, Chart 1). For the other four states:

  • Uttarakhand: BJP won a clear majority, 57 out of 70 seats from 31 in the 2012 election
  • Manipur: BJP captured 21 out of 60. It failed to reach a clear majority, but it is a major improvement from zero in 2012. The INC also lost seats, capturing only 27 from 42 in 2012 and fell just short of a majority
  • Punjab: The BJP and Shiromani Akali Dal (SAD) coalition lost ground and captured only 18 seats from 68 in 2012 out of the total seats of 117. Finance Minister Arun Jaitley noted BJP had been in power for the past two terms and the anti-incumbent sentiment may have taken its toll. INC performed the best in this state: it gained a clear majority with 76 seats out of a total of 117 and from 46 in 2012
  • Goa: BJP lost seats, capturing just 13 from 21 in 2012 out of a total of 40 seats. INC picked up 17 seats from 9 in 2012 but failed to get a clear majority
Table 1: Full results for state elections

State

Parties

2017 state elections (No. of Assembly seats)

2012 state elections (No. of Assembly seats)

Uttar Pradesh (31 out of 245 Upper House seats)

BJP + AD + SBSP

325

48

SP + INC

54

252

BSP

19

80

Others

5

5

Total seats

403 (202 for simple majority)

Punjab (7)

INC

77

46

SAD + BJP

18

68

AAP

20

0

Others

2

3

Total seats

117 (59)

Uttarakhand (3)

BJP

57

31

INC

11

32

Others

2

7

Total seats

70 (36)

Manipur (1)

BJP

21

0

INC

28

42

Others

11

18

Total seats

60 (31)

Goa (1)

INC

17

9

BJP

13

21

Others

10

10

Total seats

40 (21)

Source: Election Commission, Commerzbank Research

Chart 1: 2017 state election breakdown: BJP makes strong gains in Uttar Pradesh

NDA (BJP coalition) performance in 2017 election vs previous in 2012

Chart 1: 2017 state election breakdown: BJP makes strong gains in Uttar Pradesh
Source: Election Commission, Commerzbank Research

We see the following implications:

  • Endorsement for Prime Minister Modi’s demonetisation policies: Despite the hardships caused, the strong pro-BJP vote suggests most are in favour of the government’s actions, as we outlined in ‘Demonetisation: A short-term drag on growth’ on 24 November 2016. Although the poor suffered, the consensus seems to be that it will help to tackle corruption and clamp down on the underground economy in the long run. More broadly, it is also seen as a green light for Modi’s pro-poor and pro-reform agenda, as we outlined in ‘Incremental not glamorous reforms after two years’ on 26 July 2016 (Chart 2)
Chart 2: Demonetisation to have a transient effect

GDP percent year-on-year, fiscal year (April to March)

Chart 2: Demonetisation to have a transient effect
Source: Bloomberg, Commerzbank Research
  • Modi the front runner for 2019: It raises the prospects of Prime Minister Modi securing a second term in 2019. It reinforces his position as the most influential and popular politician in India and cements BJP’s strong position. After the victory in Uttar Pradesh and Uttarakhand, BJP now controls over half of the 29 state parliaments. BJP’s pole position is also partly due to the disorganisation in the INC.

    In terms of policy implications, it should aid prospects of policy continuity through 2024. Furthermore, it may even raise hopes of even bolder and faster-paced reforms down the track, but this is still uncertain. Near term, we don’t envisage a major pickup in reform efforts or implementation. Nevertheless, the feel-good factor should persist which should in turn support investor sentiment
  • Upper House: Representatives in the Upper House are chosen by elected members of the State Legislative Assembly. As such, the results from the state elections indirectly affect the composition of the Upper House. At present, the NDA holds only 74 out of 245 seats in the Upper House (Chart 3).

    At this stage, it is nearly impossible for the NDA to reach the 123 treshold needed to control the Upper House before the 2019 general elections. For the next two years, 78 seats are due for elections (Table 2 and 3). Ten of these vacancies will be from Uttar Pradesh. Many of the remaining seats are already held by NDA representatives, thus limiting its potential net gains and leaving it still well short of a majority. BJP’s strong performance in Uttar Pradesh nevertheless should be viewed as progress. In the meantime, we expect BJP to continue to operate by consensus to push legislations through the Upper House. One prominent example is the passage of the Goods and Services Tax (GST)
Chart 3: NDA does not have a majority in Upper House

NDA percent share of seats in the Upper House

Chart 3: NDA does not have a majority in Upper House
Source: Election Commission, Commerzbank Research
Table 2: Upcoming state elections

Upcoming

Expected election dates

No. of Assembly seats

No. of Upper House seats

Gujarat

Nov./Dec. 2017

182

26

Himachal

Nov./Dec. 2017

68

4

Nagaland

2018

60

2

Kamataka

2018

224

28

Meghalaya

2018

60

2

Tripura

2018

60

2

Mizoram

2018

40

1

Source: Election Commission, Commerzbank Research

Table 3: List of states and the next elections

States

Elections due

Assembly seats

Lower House seats

Upper House seats

1

Andhra Pradesh

2019

175

25

11

2

Arunachal Pradesh

2019

60

2

1

3

Assam

2021

126

14

7

4

Bihar

2020

243

40

16

5

Chhattisgarh

2019

90

11

5

6

Delhi

2020

70

7

3

7

Goa

2017

40

2

1

8

Gujarat

2018

182

26

11

9

Haryana

2019

90

10

5

10

Himachal Pradesh

2018

68

4

3

11

Jammu and Kashmir

2021

87

6

4

12

Jharkhand

2020

81

14

6

13

Karnataka

2018

224

28

12

14

Kerala

2021

140

20

9

15

Madhya Pradesh

2019

230

29

11

16

Maharashtra

2019

288

48

19

17

Manipur

2017

60

2

1

18

Meghalaya

2018

60

2

1

19

Mizoram

2018

40

1

1

20

Nagaland

2018

60

1

1

21

Odisha

2019

147

21

10

22

Pondicherry

2016

30

1

1

23

Punjab

2017

117

13

7

24

Rajasthan

2019

200

25

10

25

Sikkim

2019

32

1

1

26

Tamil Nadu

2021

234

39

18

27

Telangana

2019

119

17

7

28

Tripura

2018

60

2

1

29

Uttar Pradesh

2017

403

80

31

30

Uttarakhand

2017

70

5

3

31

West Bengal

2021

294

42

16

Reserved for five Union Territories

5

Nominated

2

12

Total

4,120

545

245

Source: Election Commission, Commerzbank Research

  • Presidential outcome: The decisive victories in Uttar Pradesh and Uttarakhand empowers the NDA in the selection of the next president. Current President Pranab Mukherjee (a nominee from the opposition United Progressive Alliance) is due to step down when his five-year term ends this July. While the presidency is a largely ceremonial position, it holds considerable legislative and emergency powers, including the nomination of members to the Upper and Lower Houses
  • Positive sentiment towards the Indian rupee: The surprised strong showing for BJP in Uttar Pradesh should be viewed positively by the markets. This is seen in terms of political stability, policy continuity, and endorsement of Modi’s pro-reform and market-friendly agenda. The Indian rupee has appreciated by around 2% year-to-date against the US dollar to around the 66.60 level. Our forecast for the exchange rate USD/INR is 69.00 by year-end on the back of a firmer US dollar on prospects of more rather than less rate hikes from the Federal Reserve this year

However, even if the US dollar gains toward year-end, the Indian rupee may hold its ground against its regional peers. This is due to the positive investor sentiment, improvement in macrofundaments, i.e. stable current account deficit, and the Reserve Bank of India’s (RBI) shifting to a neutral stance from accommodative at the end of February. The RBI’s shift in policy stance does not necessarily imply an imminent rate hike or the fact that rate cuts are off the table altogether. Much will depend on the inflation profile in coming months after sliding to just 3.2% year-on-year in January 2017 which is below RBI’s longer term target range of 4 to 6%.

Chart 4: NDA forms majority government in Uttar Pradesh and Uttarakhand

NDA (BJP coalition) performance in 2017 election vs previous in 2012

Chart 4: NDA forms majority government in Uttar Pradesh and Uttarakhand
Source: Election Commission, Commerzbank Research