Over the weekend the election results from five Indian states, Goa, Manipur, Uttarakhand, Punjab and most significant of all, Uttar Pradesh (UP) were announced.
Following discussions with journalists and poll experts on my trip to UP last week, consensus was that the Bharatiya Janata Party (BJP) of Prime Minister Narendra Modi was closing in on a marginal majority. However, recent history has shown that psephologists (political scientists) have been too conservative in their estimation of populist persuasion. Once again this has proven to be the case.
These results conclusively set-up India for a period of political stability likely to last for at least seven years, unique in emerging markets and indeed globally. Indian assets were not pricing this outcome, and we expect the positive boost to sentiment to aid both the stock market and the Indian rupee.
I make no apologies for focusing on the UP election results, with a population of 200m people, and 80 parliamentary seats up for grabs. It is by far the most influential election ahead of the 2019 general election. With these results the BJP, or rather Modi, has in cricket parlance, smashed a six right out of the ground. Prior to the results, expectations at the upper end were for the BJP to win around 220 seats of the 403 being contested in UP. It is abundantly clear that number was hugely underestimated, with the BJP winning 312 seats in the state.
The results have thrown up a litany of topics to be debated, however there are perhaps four items that deserve prominence at this time.
The first has been the referendum on Modi’s demonetisation experiment
Launched in November 2016, Modi staked nearly all his political capital on this gamble, with efforts to stamp out corruption, increase tax receipts and create greater transparency within businesses. This election result is testament to the belief from the “common man” that Modi is their saviour who will drive out corruption and make the lives of ordinary Indians incrementally better.
The second factor to note is that Modi contested this UP election on a development, job creation and law and order platform. The opposition parties could not compete on the three fronts combined. Add to that the fact that Modi controls central government, UP voters were inclined to align to the centre. Historically states that have a leader from the ruling government typically outperform their peers, with the likelihood of development and spending in the state to see a step change with the BJP in power. Infrastructure and industries that create jobs will be the focus in the state and across the country in the coming quarters.
The third issue to consider is the reform agenda, which for some has been disappointing with headline reforms such as land and labour bills not being passed. One can expect that with this level of support, the BJP and Modi will feel emboldened to intensify the reform agenda in the next two years. Goods and Services Tax (GST) is scheduled to be implemented in July 2017 and we do not foresee any delays. The Prime Minister will use this invigorated mandate to progress reforms that should improve his chance for success in 2019.
The fourth and final point is the changing dynamic of the Indian voter. UP elections have historically been won or lost along both caste and religious lines. The results suggest that voters are now looking beyond these two polarising factors and are focussing instead on economics and development opportunities. We have seen evidence in these results that a large number of women have voted in favour of Modi and perhaps more significantly, Muslims have turned out in force to back Modi. This will give great encouragement to the BJP ahead of the general election, particularly in states where they have tended to perform poorly due to caste or religious voting. It is also an indication of the young voter wanting change and believing that the BJP can deliver that change to make a meaningful difference in their lives. While religion and caste bias may never be eliminated in India, these results show that other factors are now being considered at the ballot box.
Modi has received the biggest seal of approval since the 2014 general election. He will use this momentum gathered to build for re-election, which will be seen positively by the Indian equity markets.