Foreign institutional investors are expecting the Third Front (read the Left) to play a crucial role in the formation of the new government and are worried about the fallout.
“With neither UPA or NDA coalition likely to come close to the 272 seats necessary to form a Government, the third front (along with Left parties) could play a crucial role. This could put reforms on the back burner.”, said Citibank in its India macro flash report. Goldman Sachs has even ruled out formation of a government without the Left parties.
According to Credit Suisse analysts, Nilesh Jasani and Arya Sen, “In the worst-case scenario where both leading coalitions have less than 160 seats, it would be bad for equities in the short and long term”.
Credit Suisse further says that if the difference between the two coalitions is more than 25 seats, the market would likely take it positively. If not, the process could be chaotic. “Either way, uncertainties could remain high in the market, based on the course the coalition formation process takes,” it said.
However, some feel economic fundamentals rather than political formations will drive stock markets. Standard Chartered Bank has said in its report that markets are driven more by economic fundamentals rather than political events in the medium term.
Goldman Sachs economist Tushar Poddar said, “If the NDA were to form the next government, we expect beneficial policies for infrastructure, support for exports, and possible privatisation, thereby positively impacting state-owned firms”
Goldman Sachs feels if UPA forms the next government with support of the Left, it is likely that there will be few changes to the policies adopted over the past five years. “A UPA-led alliance may focus on rural and social sectors, while a BJP-led government may concentrate on infrastructure and pro-business policies,” said the report.
