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Macro Note ’s 17th Election Preview: Three Key Scenarios To Consider

Monday, 01 April 2019 The 2019 Indian general election is to be held in seven phases from 11th April to 19th May 2019 to elect the members of the . The counting of votes will be conducted on the 23rd May 2019, and the results are slated to be declared on the same day.

Barnabas Gan As for the current (House of the People, the lower house of India’s bicameral Economist [email protected] Parliament), the (BJP) held majority of the seats - 282 out of 543 seats according to the 2014 election results. There is no opposition leader in the current Lok Sabha, given that none of the other political parties had at least 10% (or 55 seats) to secure opposition status.

Exhibit 1: Indian General Election Result Share of Total Votes, 2014

Source: Election Commission of India, UOB Global Economics & Markets Research

Bharatiya Janata Party, 31.0%

Others, 42.6%

Anna Dravida Munnetra Kazhagam, 3.3% Indian National Trinamool Congress, 19.3% Congress, 3.8%

Exhibit 2: Indian General Election Result, Share of Seats, 2014

Source: Election Commission of India, UOB Global Economics & Markets Research

Others, 26.9%

Bharatiya Janata Anna Dravida Party, 51.9% Munnetra Kazhagam, 6.3%

Trinamool Congress, 6.8%

Indian National Congress, 8.1%

India’s 17th Lok Sabha Election Preview: Three Key Scenarios To Consider Monday, 01 April 2019 1 I Page Given the schedule of the elections, India is less than two weeks away from general elections. To-date, the two major parties that appear to be in increasingly close contest are the incumbent Bharatiya Janata Party (BJP) led by Prime Minister , and the (INC) Party led by . The government in India adopts the Westminister- style model in which parties vie for a total of 543 seats in the lower house. The election follows the First-Past-The-Post (FPTP) system, or also known as the simple majority system, where the candidate getting the highest number of votes is declared elected.

Pre-election polls are indicating a potential BJP absolute victory. According to the latest March poll done by the Times Now and VMR Survey, the BJP is predicated to win 283 seats out of 543 seats (or 52.1% of total seats). This suggests that the Modi-led incumbent party is expected to clinch a similar majority result seen in the 2014 general election. This is up from a previous pre- election survey in January 2019, where the BJP was projected to only win 252 seats (46.4% of total seats). Other popularity surveys however, suggest Modi’s declining popularity. See Exhibit 3 which shows poll released by India Today Group Karvey Insights (Feb 2019).

Exhibit 3: Who Is Best Suited To Be India’s Next Prime Minister?

Source: India Today Group Karvey Insights, UOB Global Economics & Markets Research

70

60

50

40 % 30

20

10

0 Feb-16 Jul-16 Dec-16 May-17 Oct-17 Mar-18 Aug-18 Jan-19 Narendra Modi Rahul Gandhi

The Modi-led BJP party is seen to have an edge over its political rivals given four key areas.

ƒƒ First, the government had introduced an interim budget in February 2019, which is seen to be populist in nature. The measures in the interim budget included spending measures worth Rs 1.8 lakh crore (US$25.37 billion) and tax cuts in the current fiscal year ending 31st March likely in an attempt to garner favour from the farmers and the urban middle class.

ƒƒ Second, the militant attack in Kashmir on the 14th February which killed 40 Indian paramilitary personnel is also seen to help Modi ahead of the elections. The government- led retaliation on Pakistan territory on 26th February in the attempt to destroy Pakistan- based jihadist terrorist group Jaish-e-Mohammed hideouts in Balakot likely to have resulted in a boost to pro-Modi approvals.

ƒƒ Third, India under Modi’s leadership is seen to have achieved higher potential economic growth. Since Prime Minister Modi came to office in 2014, India managed to maintain real economic growth averaged 7.3% over the period 2014 - 2018, similar to the average in 2009-13 period, marking it the fastest growing economy in the world and ahead of China. Kindly refer to Exhibit 4 for more details. The Asian Development Bank (ADB) also commented that India will continue to remain as the world’s fastest growing economy into FY2020, led by increased public spending, higher capacity utilisation rates and an uptick in private investment into the FY2019 – FY20201.

1 Asian Development Bank, Asian Development Outlook Supplement (The Outlook Remains Stable), July 2018

India’s 17th Lok Shaba Election Preview: Three Key Scenarios To Consider Monday, 01 April 2019 2 I Page Exhibit 4: India’s Real GDP Since 1964

Source: Bloomberg, UOB Global Economics & Markets Research

10 8.7 9

8 7.3 7.3 7 6.3 5.7 6 5.6 4.7 4.8 5 % y/y 4 3.6 3.0 3.2 3 2 1 0 1964 - 1969 - 1974 - 1979 - 1984 - 1989 - 1994 - 1999 - 2004 - 2009 - 2014 - 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018

ƒƒ Fourth, the BJP party is seen to rely on its past flagship programs to show its policy success in the past years. These included providing toilets, electricity connections, houses, cooking gas, crop insurance etc, which had benefited about 220 million Indians. Similar to the above-mentioned point, the ADB also cited government measures “taken to strengthen the banking system” will encourage further private investment while “benefits kick in from a new goods and services tax”2.

A BJP’s victory in the upcoming election hinges also on recent criticisms against the Modi government’s policies. We note BJP’s recent losses of three big state polls since December 2018, which suggested Modi’s falling popularity. Key criticisms against the BJP will likely center on India’s labour market (given that overall unemployment rate has more than doubled from 3.4% back in July 2017 to 7.2% in Feb 2019), farm crisis involving farmers’ demands to obtain debt waivers and procurement of produce at remunerative prices, and the potential slowing of India’s domestic economy should global uncertainties surrounding the US-Sino trade negotiations persist. Other criticisms to Modi’s government also include the move in November 2016 to demonetise 86% of India’s currency overnight via the demonetization of all 500 and 1,000 Rupee note, which caused severe cash crunch and growth headwinds.

We identity three potential scenarios that could come to pass in the upcoming election:

ƒƒ The base case scenario in our view would be an absolute Modi-led victory. Given the latest survey polls indicating that the BJP could secure over 50% of seats in the lower house, we think that this scenario could have a fair chance of it coming to pass. A Modi-led victory would mean policy continuity and a relative sense of economic stability.

ƒƒ However, a Modi-led coalition is another possibility. This is given the fact that Modi’s popularity has been shrinking progressively to-date (although still seeing a comfortable lead at this juncture) amid the criticisms being raised against his past policies. This would happen if neither party is able to secure a majority in the elections. For that matter, coalition governments are of no stranger to India; since 1989, coalition governments were elected into office until Modi’s absolute victory in 2014. This scenario in turn, should also be seen to be positive to growth given the premise of policy continuity.

ƒƒ Lastly, a potential Congress-led coalition can also be considered in the event that Rahul Gandhi secures more seats versus Modi-led BJP. The popularity for the Indian National Congress Party has been rising, in the midst of its recent promise to give income support for each poor family that earns less than INR12,000/month (US$174) as a campaign strategy.

2 Asian Development Bank, Asian Development Outlook Supplement (The Outlook Remains Stable), July 2018

India’s 17th Lok Shaba Election Preview: Three Key Scenarios To Consider Monday, 01 April 2019 3 I Page We included four exhibits in the appendix below, highlighting how the India stock market, 3M Interbank Rate, 2-10 yield spread and the Indian Rupee behaved in past four elections (1999 – 2014). We saw that the NIFTY 500 had declined during the 13th Lok Shaba (1999) and 14th Lok Shaba (2004) but saw sustained gains in other election periods. This was likely due to specific issues surrounding the 13th and 14th Lok Shaba:

ƒƒ The 13th Lok Shaba election was held given a period of relative political instability when BJP’s then prime minister Atal Bihari Vajpayee saw one of its coalition partners, the All India Anna Dravida Munnetra Kazhagam (AIADMK), withdrawing its support.

ƒƒ The 14th Lok Shaba election result was unexpected as pre-election polls highlighted BJP’s popularity then. The final result showed that the Indian National Congress (INC) had won the elections with a small margin over the BJP of 145 – 138.

ƒƒ Volatility in the stock market is also perceived to be higher immediately post-election (+45.8% in 40 trading days after the 15th Lok Shaba election, or -22.6% after 46 trading days after the 14th Lok Shaba election).

ƒƒ India’s 3M interbank rate (MIBOR) has broadly declined in the 2014, 2009 and 1999 elections. A closer look highlights that the fall in rates is accompanied by lower central bank rates. Into 2019, we expect another rate cut by the Reserve Bank of India (RBI), which suggests lower 3M MIBOR into the year as well.

APPENDIX

Nifty 500

Source: Macrobond, UOB Global Economics & Markets Research

200 180 160 140 120 100 t=100 80 60 40 20 0 t t-80 t-60 t-40 t-20 t+20 t+40 t+60 t+80 t-100 t+100 t+120 t+140 t+160 t+180 t+200 16th (Apr 2014) 15th (Apr 2009) 14th (Apr 2004) 13th (Oct 1999) Now (March 2019)

India’s 17th Lok Shaba Election Preview: Three Key Scenarios To Consider Monday, 01 April 2019 4 I Page 3M Mibor

Source: Macrobond, UOB Global Economics & Markets Research

500

400

300

200

100 chg bps 0

-100

-200

-300 t t-80 t-60 t-40 t-20 t+20 t+40 t+60 t+80 t-100 t+100 t+120 t+140 t+160 t+180 t+200 16th (Apr 2014) 15th (Apr 2009) 13th (Oct 1999) Now (March 2019)

2-10 Yield Spread

Source: Macrobond, UOB Global Economics & Markets Research

100

50

0

-50 chg bps -100

-150

-200 t t-80 t-60 t-40 t-20 t+20 t+40 t+60 t+80 t-100 t+100 t+120 t+140 t+160 t+180 t+200 16th (Apr 2014) 15th (Apr 2009) 14th (Apr 2004) Now (March 2019)

INR-USD

Source: Macrobond, UOB Global Economics & Markets Research

115

110

105

100 t=100

95

90

85 t t-80 t-60 t-40 t-20 t+20 t+40 t+60 t+80 t-100 t+100 t+120 t+140 t+160 t+180 t+200 16th (Apr 2014) 15th (Apr 2009) 14th (Apr 2004) Now (March 2019)

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