Reform vs Populism - India's Election

Reform vs Populism - India's Election

India’s ruling political party, the BJP, remains the front-runner ahead of this year’s election but may have seen its popularity peak. What are the implications for investors if it fails to win enough votes to govern on its own?

Prime Minister Narendra Modi has embarked on a 100-day campaign to 20 of India’s states ahead of India's General Election. He remains popular, but polls show his support may have peaked. His party’s recent showing in local elections – generally a good barometer for the direction of public support – has been lacklustre. Last year, also saw uninspiring performances from the BJP in its Hindi heartland states of Madhya Pradesh, Rajasthan and Chhattisgarh, and it failed to win in Karnataka.

Successes and failures

There have been some notable successes since 2014, with the BJP targeting reforms aimed at long-term economic stability and growth, including the introduction of the Insolvency and Bankruptcy code, the Goods and Services Tax (GST) and a focus on corruption (although the positive impact of demonetisation in eradicating ‘black money’ has so far yet to emerge).

However, a negative for the BJP has been the failure of economic growth to lift off as hoped and employment remains stagnant.

Rising populist sentiment (something not unique to India) is a problem for the BJP. Its focus on economic prudence is essentially anti-populist, while some of its policies have hurt its own voters – such as business owners impacted by the GST. Some efforts have been made to take into account of the needs of the popular vote, with policies in its most recent budget targeted at rural India and the farming community (two of the biggest sources of voter discontent).


A BJP-controlled administration would be the most market-friendly announcement, as this would see a continuation of the reform agenda

Picking sides

We believe the BJP is unlikely to retain its absolute majority, with the most probable outcome a coalition of some sorts.

The role of regional parties is particularly significant this year. The biggest risk for the BJP has always been the potential for opposition parties to unify (they were too fragmented and split by disagreements over leadership in 2014). Parties such as West Bengal’s All India Trinamool Congress, as well as traditional rivals from Uttar Pradesh – the Samajwadi and Bahujan Samaj parties – are moving towards collaborating with the Indian National Congress to create a grand alliance against Modi.

For its part, the BJP is also forming alliances ahead of the election – in the state of Tamil Nadu with the local ruling party ADMK and with Maharashtra Shiv Sena, a long-term partner in the National Democratic Alliance.

What it means for investors

We believe a BJP-controlled administration would be the most market-friendly announcement, as this would see a continuation of the reform agenda, with policies possible on land, labour and banking. Failing this outcome, a coalition with some form of BJP input would still be viewed as positive for the long-term outlook, albeit with a more gradual process of reform.

A Congress-led coalition would probably be considered a more populist government. However, even with some more populist policies, it is unlikely to roll back on anything which has been introduced since 2014. The worst result for the economy and reform agenda – and the markets – would be Congress or BJP unable to form a government, leading to a ‘third-front’ administration. Historically, these have been short-lived and unable to survive internal conflict.

From our perspective as long-term investors, our focus is on franchises which are capable of seeing through different market environments, so in this sense, there is no effort from us to ‘call’ the election.

A more populist government would probably mean a boost in government infrastructure and our strategy does not have exposure to any pure plays on government capital expenditure. Housing is likely to be a continuing theme in the Indian market though, and there are opportunities within the materials sector.

It is worth pointing out that while a populist government would be bad for sentiment, which could lead to a torrid time for the markets, we don't believe this will last, and any weakness would be an opportunity to look for sustainable franchises at attractive valuations.