What India elections mean for the market

By Michael Kitchen

LOS ANGELES (MarketWatch) — India’s general election — a massive exercise, with more than 800 million voters, that will run until May 12 — began on Monday, and the outcome has mixed implications for investors in the country. There is a lengthy menu of parties and candidates but really just two main contenders for the prime ministership. In one corner is Rahul Gandhi. While no relation to India’s founder Mahatma Gandhi, his father was prime minister, his grandmother was prime minister (both were assassinated), and he is the flag bearer for the Indian National Congress party, which leads the current ruling coalition. In the other corner is Narendra Modi, leader of Bharatiya Janata Party (BJP). The son of a tea merchant, Modi is a vegetarian and writer of poetry, and his critics describe him as a Hindu nationalist culpable for the deaths of hundred if not thousands of Muslims in communal violence when he was Gujarat chief minister. But whatever the controversy, Modi is the clear front-runner. While Indian election polls aren’t always so accurate, Modi’s BJP is seen winning 259 seats in the Lok Sabha (the dominant house of parliament) against 123 for Congress, according to a recent survey from network NDTV cited by Agence France-Presse. With 272 seats needed to control the legislature, the BJP and its alliance look very likely to form India’s next government. Some supporters of Modi say the markets have already priced in a BJP victory, dubbing recent gains for Indian stocks and the rupee /quotes/zigman/4868630/realtime/sampled USDINR +0.18%   as “Modi Magic.” The benchmark Sensex /quotes/zigman/1652085/realtime IN:1 -0.60%  and CNX Nifty are up 5.6% and 6.2%, respectively, for the year to date. Such chatter has grown loud enough that current Finance Minister Palaniappan Chidambaram felt compelled to trash the theory in recent speeches. “I am amused to read in some sections of the media that it’s the hope of a stable government that is bringing in investments and driving up the capital market and the value of the rupee,” The Wall Street Journal quoted him as saying in a speech late last month, adding that those gains are really a function of the current government. “It’s obvious that Big Business — and I am using the word Big with a capital B — is supporting BJP, but that’s because Modi is known to favor crony capitalism,” Chidambaram said at a subsequent press briefing. In fact, the details of Modi’s economic policy (inevitably dubbed “Modinomics” by the local news media) are still vague, with the BJP expected to release a list of proposals this week. Reuters offers some clues as to the thrust of Modinomics, quoting some of his advisors and other supporters as comparing Modi to conservative British Prime Minister Margaret Thatcher. “If you define Thatcherism as less government, free enterprise, then there is no difference between Modinomics and Thatcherism,” the Reuters report quotes Deepak Kanth, a London-based banker and Modi supporter, as saying. Specifically, Kanth sees Modi as smashing through India’s red tape to revive long-stalled infrastructure projects. Indian economist Arvind Subramanian agrees that Modi’s intentions involve a Thatcher-like “Big Bang” of policy moves, but he’s not sure the BJP leader (assuming he becomes prime minister) can pull it off. “On arrival in office, he is expected to identify the 25-50 most important stalled infrastructure projects, locate the bottlenecks and authorize their removal. Hyperactivity on resuscitating big projects will be the most visible sign of the new regime,” Subramanian wrote in a commentary published recently in several newspapers. “But this hyperactivity will face two challenges. Economic decentralization being well advanced, the levers of economic power affecting infrastructure projects ... reside with the states. A majority, including the large states, will be controlled by opposition parties. Similarly, getting the large private-sector infrastructure companies to invest might require taking some of the debts off their books, which will raise concerns about cronyism, create moral hazard and weaken further bank balance sheets,” he writes. Meanwhile, HSBC is tipping a pullback for the rupee, at least once the election dust settles. “We have found the currency tends to benefit into an election but struggles to maintain such positive momentum after the event,” HSBC economists wrote in a recent note. HSBC also warns investors to expect far more government spending than what was outlined in the interim budget earlier this year, which they saw as containing “overly optimistic assumptions on increases in tax revenues and reduction in subsidy expenditure.” “An analysis of past elections reveals that borrowing estimates presented in the interim budget tend to be revised higher during the final budget. The largest revision in borrowing numbers occurred in the 2004-05 fiscal year, when the BJP-led National Democratic Alliance was replaced by the [Congress-led] United Progressive Alliance,” they write.

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