Tags: Elections | Wrench | India

Elections Throw a Wrench in the Works in India

Wednesday, 07 Mar 2012 10:04 AM

By Ashish Advani

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The much-debated and drawn-out elections in India ended last week and the results were just announced.

This election was over five states including the most populous state called Uttar Pradesh. The population of Uttar Pradesh is about 200 million and elections were held across this massive state in seven stages.

While it is heartwarming to see that democracy is alive and thriving in India, it was a massive exercise and was a logistical and political nightmare.

In the end, the congress party that rules at the federal level lost. They had raised their profile in the state and wanted a large role. The fight was between the two youthful scions of two political dynasties. Like any election, there is only one winner. The regional party withstood the onslaught of the federal party and won the hearts of the people.

This will definitely lead to some unintended consequences. In my opinion, it will hurt growth in India. It will be a few weeks before we know for sure, but my guess is that economic reforms in India will slow further.

The general election in India is slated for 2014. This loss in a few states, while not fatal, will certainly put the ruling party in a defensive stance. The reform-minded prime minister will find it harder to push through economic reforms which require political fortitude.

The current government, with its eyes on the elections of 2014, will start back peddling on tough reforms and start down the path of concessions and people-friendly policies to appease the masses and gain traction for the 2014 national election.

As a result, the current rally in the stock market may stall. The mix of stocks within the rally will also change. If the defensive strategy of the government comes to fruition, we will see financial stocks, capital-investment-heavy stocks and investment cyclical stocks suffer. We will see the resurgence of defensive and consumer stocks.

I would be remiss if I didn't point out the alternative scenario as well. In the past few months leading up to these elections, the government had tried to soft peddle the reform agenda and hold back the important reforms until after these elections. In other words, they had slowed reforms with an intention of gaining electoral dividends. Now that it is clear that the strategy of slowing reforms didn't work, they may change their strategy.

The budget in India will be announced in 10 days. With that announcement, we will get clear signals whether the reforms will be back on track or if the government will throw fiscal responsibility out of the window and pander to the public. At that stage we can chart our next steps on the India investment strategy.

A few weeks ago, I had written about how elections around the globe this year would lead to slow stock-market gains. This is a prime example of that.

On a positive note, we saw how the Russian elections were a farce; the Chinese are being introduced to their new selected, not elected, leader this week.

At least in India, the wheels of democracy are still spinning and people have a right to electing leaders to govern them well. India still has that going for it.

© 2014 Moneynews. All rights reserved.

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