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On 11 December, the announcement of election results from five
Indian states confirmed that Prime Minister Narendra Modi's
Bharatiya Janata Party (BJP) had lost power in three of the
states.
The BJP's losses indicate an increased likelihood of an
electorally driven policy agenda prior to the 2019 parliamentary
elections, potentially including increased budgetary support for
agriculture and micro, small, and medium-sized enterprises
(MSMEs).
Following the appointment of a reportedly government-friendly
governor at the Reserve Bank of India (RBI), the BJP is likely to
seek greater RBI policy alignment.
The BJP is also likely to appease Hindu voter sentiment by
offering tacit support for construction of a Hindu temple in
Ayodhya, Uttar Pradesh, leading to an increased frequency of
rallies by right-wing groups affiliated with the BJP in the
six-month outlook.
A coalition government under Modi is likely to focus on
executive-driven policy-making after the elections.
India's nationally ruling Bharatiya Janata Party (BJP) lost to
the main opposition Indian National Congress (INC) party in the
states of Chhattisgarh, Madhya Pradesh, and Rajasthan - hitherto
BJP strongholds - marking an adverse indicator for the BJP's
prospects in the 2019 general election. The BJP's reversals reflect
multiple voter concerns and increase the likelihood of an
electorally driven government policy agenda ahead of the general
election; this is likely to include efforts to strengthen the
economy and boost Hindu voter support.
Although unrelated to the state elections, on 10 December the
Reserve Bank of India (RBI) governor, Urjit Patel, resigned
following policy disagreements with the government over the RBI's
policy stance. His replacement by Shaktikanta Das (a former
Secretary of Economic Affairs at the Ministry of Finance) strongly
indicates the government's intention to seek RBI alignment with its
policies.
Rural and urban constituency losses imply government
pre-electoral focus to support agriculture and MSMEs
The BJP reportedly lost seats across rural and urban
constituencies. The December 2017 Gujarat state elections indicated
already weakening rural voter support for the party, most likely
because of demonetization measures and tepid growth in the
agricultural sector.
Urban losses indicate that unemployment is also an emerging
voter concern. Although the government has ceased to publish
official unemployment figures since March 2018 (citing its work on
devising a new labour survey methodology), a recent survey by the
All India Manufacturers' Organization suggested heavy job losses,
claiming that each segment within the micro, small, and
medium-sized enterprises (MSME) category has reported job losses of
about 25-35% since 2014.
To assuage adverse rural voter sentiment, the government is now
likely to announce significant budgetary support for agriculture,
increasing loan waivers for farmers and raising minimum support
prices (MSP) for farm produce. To improve urban voter sentiment,
the government is likely to focus on improving economic conditions:
in November, it announced a 12-point program to address problems
affecting MSMEs, including the provision of easier access to credit
and relaxing bank-loan restructuring standards.
Government likely to seek RBI policy support to
facilitate policies
The government's policy agenda, particularly its ability to
provide budgetary support, has been restricted by its fiscal
deficit objectives: for the year ending March 2019, it set a fiscal
deficit target of 3.3% (excluding provincial deficits) versus 3.5%
in fiscal year 2017. The recent conflict with the RBI reflected the
government's attempts to persuade the RBI to loosen its stance in
order to facilitate the government's realization of its objectives.
A notably contentious area is the Economic Capital Framework (ECF),
under which the RBI decides the level of dividends payable to the
government after maintaining sufficient reserves to protect India
from future economic shocks; the government had sought increased
payments to help it achieve its deficit goals while permitting
increased budgetary support to the agricultural sector.
A second major area of dispute is the government's desire to
ease the Prompt Corrective Action (PCA) framework to permit
increased state bank lending to the real economy, particularly
favoring MSMEs and non-banking financial companies.
Outlook and implications
The state election results indicate incremental voter support
for regional parties, increasing the likelihood that these will
play a pivotal role in government formation after the 2019
parliamentary elections. INC control of new state governments in
Madhya Pradesh and Rajasthan relies upon an alliance with the
regional Bahujan Samaj Party (BSP). The state governments of
Mizoram and Telangana will also be led by regional parties.
A post-electoral coalition government under Prime Minister
Narendra Modi will probably attempt to refocus its strategy
regarding policy implementation. If it held fewer seats in the
parliamentary lower house, the government would be likely to seek
policy alignment across institutions and ministry-level agencies -
as is now likely with the RBI - and to increase executive-driven
policymaking instead.
Although the government's pre-electoral policy agenda will focus
on strengthening the economic outlook, increased - probably tacit -
support is likely for initiatives to appease Hindu voter sentiment.
BJP-affiliated right-wing organizations such as the Rashtriya
Swayamsevak Sangh (RSS) and the Vishwa Hindu Parishad (VHP) are
likely to organize more rallies across major cities to galvanize
support for building a Hindu temple at a contested site in Ayodhya,
Uttar Pradesh, where the Babri Masjid mosque was destroyed -
allegedly by these groups - in December 1992. A similar rally held
in New Delhi on 9 December involved thousands of participants with
calls to destroy the Jama Masjid, another mosque, in that city. IHS
Markit assesses that these rallies are intended to boost Hindu
voter support for the BJP; although currently unlikely to escalate
into communal riots, they are likely to generate severe traffic
disruption and localized instances of communal violence.
Going forward, the RBI's stance on the ECF and the PCA will
provide an important indicator of whether institutional
independence will be diluted to assist near-term government policy
goals. On 14 December, the RBI held its first board meeting under
Das's governorship without announcing any decisions on either
policy. Conceding to government pressure ahead of the elections
would indicate an erosion of the RBI's policy independence and a
reversal of its past efforts to force a clean-up of India's
troubled state-owned banking sector.
Separately, India's Supreme Court is scheduled to announce its
judgement regarding the demolition of the Babri Masjid on 29
January. An announcement blocking the construction of a Hindu
temple in Ayodhya would significantly increase the likelihood of
communal violence across the country, leading to property damage
and business disruption. It would also risk accentuating a rumored
split between the BJP and the RSS, unless the government
subsequently passed an ordinance to permit the temple's
construction.
Posted 20 December 2018 by Deepa Kumar, Senior Analyst – Asia-Pacific Country Risk, IHS Markit