Bihar state assembly elections results have turned markets upside down with Sensex and Nifty falling, government bond yields rising and the INR depreciating. Why are markets so concerned about the election results in one of India’s most backward state? Is it more noise than fact or is there a sound fundamental reason for markets to react negatively to this election results.
The reasons given for weak markets post the election result are a) PM Modi on whose plank India’s growth story is being built is seen as losing ground b) Reforms may not be passed by the Upper House if the ruling party does not have enough support c) Government may become populist d) Allies may ditch support in other states
On the face of it, the reasons may have strength but in real economic terms the argument may not be valid. Looking over the shoulder, which one should not but for reference sake, India since 1990 has largely had fractured verdict in polls but that has not prevented the development of the country.
Its true governments have clearly taken wrong decisions but ultimately markets force them to stay on course as seen by the collpase of the UPA in its secord term when India’s macros were horrible with high inflation and high deficits. The UPA government initiated steps to correct the weak economy, which was then carried forward by the new Modi government.
Global factors too now have a huge say in the functioning of the economy. India is seeking foreign investments for development of infrastructure and technology and for that it requires credibility with foreign investors, rating agencies and global developmental agencies. India has no choice but to follow the path of good governance at the centre.
Will Bihar elections force the government to ditch its governance? No. The government is keen on attracting foreign investments and for that it needs to keep down inflation expectations, keep down deficits and undertake reforms. The UPA debacle is still weighing on the minds of policymakers.
The market reacting to Bihar elections is like the way markets reacted to Greece debt default. Markets were volatile with many theories floating about on the effects of the default but ultimately it was settled as everyone knew it would and markets went back on course.
Sensex, Nifty, Government Bond Yields and INR will see some volatility in the near term but will then move on fundamentals going forward and currently the fundamentals look to be improving with inflation down, interest rates down and deficits in check.
Bihar State Elections
The verdict of the State Assembly elections in Bihar has given a clear mandate to the Grand Alliance. The Grand Alliance which is an alliance between Janata Dal (United), Rashtriya Janata Dal and Congress won 178 seats in the 243 member House. RJD emerged as the leader of the pack winning 80 seats while the JD(U) won 71. Both the parties had contested 101 seats each. Congress also won 27 seats out of 41. The Bharatiya Janata Party won only 52 seats out of the contested 157 seats in the State of Bihar.
The BJP-led National Democratic Alliance (NDA) has a comfortable majority in the Lok Sabha, but lags in numbers in the Rajya Sabha, the upper house, where members are elected by the strength of legislators in the States. The Bihar elections were seen as decisive for setting the Centre’s economic agenda with some half a dozen state assemblies in the queue to go to the polls in the next few months.
The markets have reacted to the election results with the Sensex and the Nifty sharply down in the morning in the range of 1.5% to 1.75% in the morning trade today. The market has reacted negatively on account of the poor performance of the BJP in the State Assembly elections of Bihar. The BJP would now have to make sure that they are able to win seats in the State Assembly elections of West Bengal, Assam, Tamil Nadu and Kerala in the year 2016. It is very important for the BJP to win seats in the upcoming elections as the strong mandate at the Centre requires a strong support from the States. Any lack of support from the States leads to poor mandate at the Rajya Sabha level making it difficult for the party in power to undertake and implement economic reforms. Markets are factoring in the fractured mandate of the BJP Government at the State level which postpones achieving better macroeconomic conditions for the Indian economy in the time to come.