Implications of recent BJP losses in Indian state elections

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