Market looks to reform signals from Bihar election result

Verdict will tell whether Modi government still enjoys the popular mandate

When Chief Election Commissioner (CEC) Nasim Zaidi called the coming Assembly election in Bihar the “mother of all elections”, it was no hyperbole. For, even before he could announce the specific September-October dates for election to the state’s 243 seats, political parties have started their fierce campaigns.

Prime Minister Narendra Modi will on Saturday address his first rally for the state election in Muzaffarpur, the so-called capital of North Bihar. Chief Minister Nitish Kumar has already taken a lead with his knock-on-door campaign.

Another set of players — the leading lights of the market — also agree with Zaidi’s observation and are keenly watching whether the Delhi election results were just a one-off setback for Modi’s political juggernaut. There is a solid reason for their anxiety — investors, both domestic and foreign, pumped in nearly Rs 70,000 crore in the six months following the announcement of the 2014 Lok Sabha election results. This was possibly the highest ever for any six-month period after general election results in India. The Sensex, the benchmark index of BSE gained about 17 per cent in this period to 27,865 at the end of October. It has gone past 28,000 since.

 

“Bihar election is important from the context of whether the Modi government still enjoys popular mandate or not,” says Shankar Sharma, vice-chairman and managing director of First Global. Bihar and Uttar Pradesh were highly responsible for Modi’s thumping victory in the 2014 polls, as these two states added about 100 seats to the Bharatiya Janata Party’s National Democratic Alliance’s (NDA’s) total tally of 336 seats.

Since then, the electoral map has changed with a unified Opposition flexing its muscle. Arithmetically, it now looks difficult for NDA to repeat the Lok Sabha performance because they were in low thirties in terms of percentage vote share and managed to get an overwhelming number of seats because the Opposition was fragmented. “So, if they (NDA) get the same vote share they got in the 2014 contest, they are not going to come back. And, if they are wiped out in these elections or if it is a poor show, you can be very certain that in 2019 there will be a new government at the Centre,” says Sharma, who now works from his Dubai office but traces his roots to Patna in Bihar.

Raamdeo Agrawal, managing director & co-founder of Motilal Oswal Financial Services, says: “Today, it looks like it can tilt either side, so the market is neither hopeful nor ready for a huge Delhi-like debacle. The BJP-led NDA is broadly united in Bihar. The Opposition is broadly disintegrated; they are together only to face the BJP as no one trusts the other. It will be a very interesting fight.”  

But what most market players are more interested in is whether NDA would be able to strengthen its position in the Rajya Sabha, where it lacks majority and has been facing opposition to some critical items on its reform agenda. NDA currently holds 60 seats in the 245-member upper House and the Bihar election is important because, before the central government’s current term ends in 2019, 11 Rajya Sabha seats will come from this state for re-election in the next three years — that is the third-largest number after UP’s 21 and Maharashtra’s 12.

“Reform process in Parliament has been stalled, as is evident in the land acquisition amendment being put on ice. Unless NDA has a reasonably positive result out of the Bihar election, it is highly likely the reform process will come to a halt,” says Saurabh Mukherjea, chief executive (institutional equities) at domestic brokerage Ambit Capital. He is expecting the Bihar election result to have an impact of five per cent (either side) on the Sensex.

But Gautam Chhaochharia, head of India research at the Swiss bank UBS, thinks differently. “The bigger question for investors is whether any loss in Bihar election, or even longer-term loss in the UP election, will lead to the government changing its stance or not,” he says. “Political economy dictates that India needs to control inflation and revive growth and that is going to stay in my belief,” says Chhaochharia.

Neelkanth Mishra, India equity strategist for another Swiss bank, Credit Suisse, also believes that investors need to look at the Bihar election with a lens that sees beyond the Modi government’s ability to spruce up its strength in the upper House. He has been meeting investors around the world with a map of India that shows its 29 states with the name of countries it resembles in terms of population, to drive home the point how improving governance in these country-sized states will impact the Indian economy.

"Uttar Pradesh houses more people than Brazil (a BRIC member; others are Russia, India and China) while Bihar resembles Mexico," says Mishra. Of the sectors that usually drive the investment cycle, many, like power generation and metal and cement production, are suffering from overcapacity and might not need fresh investments for several years. On the other hand, some large sectors that desperately need more investment, such as power distribution, low-cost housing and urban infrastructure, are state subjects. The total state government spending is already 65 per cent more than the central government spending and is still growing, he adds.

So, what is the most important in this election is to have a stable state government that lasts five years. A dramatic improvement in state-level governance, likely driven by changing voter demands and enabled by technological advances like cheap computing, mobile telephony and the internet, is afoot. This has all the signs of a structural change and holds great promise for India in the coming years.

“BJP is not a monolithic party, so what happens in Bihar can impact the current leadership’s influence over the party,” says Mishra who also traces his roots to the poll-bound state.