Decisive win for India’s ruling coalition


Staying on for a second term with an emphatic majority underscores policy continuity and stable political environment for the next five years.
Radhika Rao23 May 2019
  • The BJP-led ruling coalition is on course for a decisive win in India’s general elections
  • The scale of victory was better than exit polls and comparable to the 2014 margin
  • Domestic financial markets extended post-exit poll gains
  • Beyond elections, attention returns to the economic to-do list
  • June/ July Budget and RBI’s June review is next key event
Photo credit: AFP Photo


Latest counts show that the incumbent National Democratic Alliance (NDA)-led by the Bharatiya Janata Party (BJP) is set to return to power with a clear majority, outdoing the average exit poll. Staying on for a second term with an emphatic majority underscores policy continuity and stable political environment for the next five years.



Apart from the overall tally, much attention was also on state-level performance where NDA fared strongly in 2014 or faced stiff competition this time around. In Uttar Pradesh that accounts for 14% of the total seats, the NDA lost some ground compared to 2014, but fared better than expected. Rajasthan, Bihar and Chhattisgarh backed the incumbent, but the opposition party gained some ground in Punjab. The NDA improved their tally in the eastern states of West Bengal and Orissa. In south, the NDA fared better in Karnataka, whilst Kerala and Tamil Nadu went to the regional parties/opposition.



Domestic markets extended the relief rally that started on Monday as actual results turned out to be better than exit polls and another five years of political stability looks imminent. While unable to skirt weak global risk sentiments, Indian markets might fare better on relative basis vs those most exposed to the fallout of the US-China trade tensions, especially North Asian currencies.

Down to the to-do list

With a key event risk out of the way, return of the incumbent government is business-as-usual for the economy and ticks a key box of political stability.

Attention here on will return to the to-do list, key amongst which is the need to address the ongoing cyclical slowdown in growth. GDP data for the March 2019 quarter is due in late-May and is likely to see growth slip to 6.2-6.4% from 6.6% in 4Q18. The key engine of growth i.e. consumption has weakened in rural and urban areas as lead indicators suggest (auto sales, non-durable production etc.) Job creation has progressed at a slower than desired pace, weighing on discretionary spending; these areas are likely to gain priority under the government’s second term. Manufacturing activity has also felt the heat from slowing consumption, and a challenging global demand/ trade outlook.

On reforms, impetus to iron out and improve the implementation of GST, financial inclusion, infra spending, banking sector efforts etc. will continue. India's political-economy has also attained modern welfare dimensions-direct cash transfer, health insurance, crop support prices, pension for unorganised sector workers etc. Consolidation of these support schemes into a welfare construct, will help boost purchasing power of agri-dependent and lower income families.

Beyond elections, two other aspects will be watched with interest. Full-year Budget in June/July and RBI rate review in June. The goal of narrowing the fiscal deficit to 3% of GDP for the centre continues to be delayed, with the February Interim Budget already making room for a small slippage in the fiscal goals. An additional ~10bp slippage in the fiscal deficit target might be on the cards at the full-year (June/ July) Budget, but not diverging wildly from the path of fiscal consolidation; as we have maintained before -3.5% of GDP continues to be a key level, which will be adhered to. Borrowings will remain high and remain a driving force for the bond markets (see here).

For the RBI, we continue to expect a 25bp cut in June, but will be a close decision due to global uncertainties, lack of clarity on monsoon and higher oil prices. If undertaken, this is likely to mark the late end cutting cycle as inflation prints are off January 2019 lows. Addressing the liquidity squeeze in the domestic credit markets will be the central bank’s priority, to transmit lower funding costs, along with supporting non-bank entities. A dedicated credit line to struggling NBFCs is unlikely as underlying problems are more solvency driven, rather than due to a shortage of liquidity. Instead, a new operational framework is in the works for non-banks to improve on their asset-liability mix. Focus is also on the RBI’s revised circular to replace the February 2018 version, which had placed stringent course-correction steps for banks to deal with stressed assets. Add to this, the government is expected to improve banks’ capital levels through periodic equity injection and pursue further consolidation of the sector.


To read the full report, click here to Download the PDF.

Radhika Rao

Economist – India, Thailand & Eurozone
radhikarao@dbs.com
 

The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.

PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No. 09.03.1.64.96422.