India local election win could spur reforms

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The strong performance of the BJP, the Bharatiya Janata Party of India’s prime minister Narendra Modi, in recent elections in Uttar Pradesh, India’s most populous state, may have implications on a broader scale, emboldening the central government to intensify its economic reform efforts.

A vote for economic development and better governance

The latest state elections in five Indian states exemplify that India’s citizens are increasingly voting for economic development and better governance rather than for entitlements and identity politics. The formation of a BJP government in Uttar Pradesh may accelerate economic progress in the state as greater cooperation between the central and state governments results in faster implementation of central and state projects.

BJP gets legislative boost

Reflecting Uttar Pradesh’s share of India’s population, and hence the proportion of seats the state has in India’s Upper House, the spectacular performance of the BJP in the state should help it boost its tally to 67 seats by end-2018 from 56 currently, making the BJP the single largest party in the house. The BJP-led National Democratic Alliance’s tally is expected to rise to 84 from 73.

While this is still far off a simple majority of 122 seats, the latest state election win should help the central government ensure passage of tough economic decisions and further its reform agenda. We expect expedited reforms and investment in Indian railways, wider implementation of direct benefit transfer (DBT) schemes across welfare programmes, and a tougher fiscal policy. It may also strengthen the government’s resolve to address key pending issues such as non-performing loans or power supply.

Structurally positive for rural consumption themes

The ruling BJP’s strengthened position should help ensure that the government’s reformist policies and schemes to help the poor are here to stay. If subsidy leakages are plugged and the money saved is passed on to the deserving, their income could increase by a substantial 40%. As a result, sectors linked to rural consumption themes such as consumer staples and cement are likely to do well in the coming years.

Published on 14 April 2017

Brijesh Ved

Head Equities - PMS & Offshore Advisory

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