India’s 16th national elections kicked off on April 7, and will continue in a series of stages around the country before concluding on May 12.

1. The Indian Elections
The Greatest Show on Earth
Insight and data for better decisions
India’s 16th national elections kicked off today and
will continue in a series of stages around the country
before concluding on May 12. There are around 815
million eligible voters, of which a record 120 million
aged between 18-22 years will vote for the first time
this year. It will be the largest election ever witnessed
in the world, a key global event and a critical time for
India whose economic growth has softened over the
years. Given the economic turmoil of the past year,
economic issues will dominate the elections.
Indian politics
The Indian Congress Party (center left) and the
Bharatiya Janata Party, (BJP, center right) are the
two national parties. The BJP is headed by Narendra
Modi, who has presided over rapid economic growth
for more than 12 years as the chief minister of the
state of Gujarat. He has been wooing voters by
pointing to his track record as a leader who attracts
investment, which is critical for India. The Congress
party, which has ruled for a decade has yet to name
its prime ministerial candidate, and has struggled in
opinion polls due to public anger over a string of
corruption scandals and sharp slowdown of economic
growth. Rahul Gandhi is campaigning for the
Congress party on a primarily socialist agenda such
as providing cheap food and guaranteed employment
in rural areas.
The power of these two national parties has waned in
recent decades in favor of regional parties which
generally represent certain caste, linguistic and ethnic
groups. They are inherently less stable and more
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interested in regional rather than national issues.
This year also saw the formation of a new party
based on an anti-corruption agenda called the Aam
Aadmi Party which tasted huge initial success in the
Delhi state elections, capturing the growing anger
against corruption under the Congress rule.
Polls indicate that whichever party emerges as the
largest, it will need to form a coalition comprised of
regional parties as well. No single party has won a
parliamentary majority in India since 1989, giving
regional leaders more power at the national level.
Economics of India
It’s been a tumultuous year for the Indian economy.
When expectations that the US Federal Reserve
would begin to taper its asset purchases were raised
in spring last year, India fared the worst of all
emerging market economies with both equity
markets and the currency tumbling. India’s wide
current account deficit and painfully high inflation
left it particularly vulnerable to the wrath of financial
markets. Efforts by the Reserve Bank of India (RBI),
led by Governor Raghuram Rajan, have succeeded
in calming markets. The RBI has raised interest
rates three times since September last year,
prioritising controlling inflation over much needed
growth and investment.
The period around an election in any country
typically causes great uncertainty in financial
markets and among investors, although for India in
2014, markets seem to be convinced that the result

2. MNI Indicators - April 7, 2014
will bring positives. Optimism about a possible
change of government has built on earlier actions by
the RBI and pushed the BSE Sensex to a new all-time
high of 22,386 on March 31. Having fallen to a low
of 17,905 in August last year, the index is up by over
25% since then.
The rupee usually depreciates against the US dollar
in the year leading into elections, possibly reflecting
uncertainty among investors. On average, the rupee
has depreciated by 9% in the 12 months run-up to
each of the last six elections.
An influx of foreign investment has helped to buoy
the market, with global fund managers pouring $937
millions into Indian equities in March – roughly three
times the level of inflows in the previous two months.
Some of the mood swing is also due to an improvement
in the external environment with better growth
prospects seen in the US and European economies.
India has also built up large forex reserves over recent
months to safeguard another run on the currency
following 2013’s experience. It now appears in a
better position to withstand any fallout from the
continued tapering by the Federal Reserve compared
with the other emerging markets such as South Africa
and Turkey.
The current account deficit, which was the biggest
drag on the rupee, has narrowed considerably to a
four-year low in the three months to December. The
currency closed at Rs 59.72 per US dollar on March
28, its strongest level for more than eight months.
As the table below depicts, at the time of the previous
two elections, the Indian economy was much
healthier than now.
Market reactions
Elections are full of surprises and India’s opinion
polls have been grossly inaccurate in each of the
previous two national elections. In 2004, Congress
won even after the polls suggested the BJP would
retain power, leading to the biggest single-day sell
off of stocks in more than four years. In 2009, most
opinion polls predicted a close fight, although
Congress won with the largest tally in 20 years.
The danger for equity markets is that they are
strongly pricing in a Modi win. Even if business
positive Modi wins, the rally in markets has been
nothing but spectacular given the current economic
malaise, leaving them very open to disappointment.
Our monthly Business and Consumer Sentiment
surveys suggest that companies have turned the
corner and appear optimistic that a new government
will turn the economy around. Indian politicians are
expected to spend around $5 billion on campaigning
for elections – so at least this splurge would give
India’s staggering economy a temporary boost!
The important question is what will happen next?
India’s diverse political landscape makes election
results hard to forecast and there are still five weeks
until the polls close. Whatever the outcome is, an
unclear verdict or a weak government would worsen
the situation. A stable government with clear reform
objectives is a must for stronger economic growth in
the coming years.
Shaily Mittal, Economist
Philip Uglow, Chief Economist
Overview
2003-04 2008-09 2013-14*
GDP growth 8.4% 6.9% 4.6%
Inflation 3.9% 8.1% 5.9%
Car sales growth 30.6% 1.8% -4.2%
Rupee:US Dollar exchange rate 5.3% -16.1% -11.6%
Bank credit growth 13.7% 24.3% 15.0%
Repo rate (average) 4.6% 7.3% 7.6%
* until data officially available

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Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved.
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