What the Gujarat election result means for the Indian economy, businesses and markets | analysis | Hindustan Times
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What the Gujarat election result means for the Indian economy, businesses and markets

Closer-than-expected Gujarat election results could mean that the NDA govt veers towards populism to retain power in 2019, say experts.

GujaratElection2017 Updated: Dec 18, 2017 17:49 IST
Prime Minister Narendra Modi after casting his vote on December 14. The too-close-for-comfort victory in Gujarat elections for the BJP could mean that the government may be tempted to turn away from the path of fiscal prudence and introduce populist measures.
Prime Minister Narendra Modi after casting his vote on December 14. The too-close-for-comfort victory in Gujarat elections for the BJP could mean that the government may be tempted to turn away from the path of fiscal prudence and introduce populist measures. (PTI)

Trends from counting of votes for assembly elections on Monday showed that the Bharatiya Janata Party (BJP) was on course to return to power in Gujarat and displace the incumbent Congress government in Himachal Pradesh. However, in Prime Minister Narendra Modi’s home state of Gujarat, current trends show the party would fall short of a two-thirds majority. Some experts see the closer-than-expected numbers—assuming current trends hold good—to mean that the NDA government could veer towards populism in a bid to retain power at the Centre in the 2019 elections.

Here’s what the results mean:

For the economy/reforms: The too-close-for-comfort victory in Gujarat elections for the BJP could mean that the government may be tempted to turn away from the path of fiscal prudence, analysts say. The upcoming budget in February is the last full budget from the current government before the country heads for general election in 2019.

“There will be every temptation for the government to try and appease the voters. We believe that while there could be feel-good announcements, the exercise in general would be a fine balancing act,” said Jayant Manglik, president of retail sales at Religare Securities Ltd. However, the downside is that populist measures might attract censure from rating agencies.

Secondly, a close victory could similarly mean that the government might not have the stomach to push aggressive reforms such as the disruptive goods and services tax.

For business: While the central government might be tempted to go populist over the rest of its term, it will also continue to pursue its anti-corruption and ease of business agenda.

“If BJP wins in Gujarat, it is a signal that they will stick to their policy trajectory, which includes reforms, anti-corruption, and fiscal consolidation agenda. All this should be positive for the economy and the stock market in the long run,”said Gautam Chhaochharia, head of research at UBS Securities India Pvt. Ltd.

For the markets: The markets have priced in a BJP victory. When early trends showed the party neck-and-neck with the opposition, the markets had tanked as much as 2.6% (about 867 points for the Sensex). However, as the ruling party recovered as counting progressed, the markets recovered. At 11.12 am, the Sensex was up 264.07 points, or 0.79%, at 33.735.30 points.

Still, the narrower victory margin and possible populism could well keep the upside capped, according to some experts. They also said that the economy and earnings will play a key role now in deciding the markets’ trajectory.

“As most major reforms are already in place, the markets will focus on earnings growth in the year ahead. We are expecting double digit earnings growth next year. We see 12-13% upside to Nifty in 2018,” said Pankaj Pandey, research head at ICICI Securities.

Ami Shah and Nasrin Sultana contributed to this story.