Political state of affairs
The latest round of elections concluded with
results of five state assemblies announced yesterday. BJP managed to retain
their power in two states - Uttar Pradesh and Uttarakhand – with a comfortable
majority, though the number of seats is lower than the outgoing assemblies. In
two other states – Goa and Manipur - BJP is well placed to make a government. In
Punjab, Aam Aadmi Party (AAP) has wiped out the traditional parties (SAD and
Congress) in one of the major upsets.
Overall, the latest elections must be seen as
continuation of some key political trends that started emerging in the past
decade that saw emergence of BJP as a primary political party in the country
and decimation of the Congress Party. BJP must be relieved after these
elections that saw the entire central government, including the prime minister
and home minister. Though less number of seats in Key states of UP and Punjab
would mean that BJP leadership would have to remain busy till Presidential
election in July are completed with a BJP candidate winning comfortably.
My key takeaways from the latest election are
as follows:
·
AAP is well placed to replace
Congress in national politics. In next 5years we may see AAP contesting to take
Congress space in key states of Madhya Pradesh and Gujarat. That will make AAP
a key national party.
·
The Modi-Yogi model of BJP means
leaders’ direct connection with the electorate. Historically BJP has relied on
the cadres of RSS and VHP for their election campaign. This may allow BJP to
gradually move towards centrist politics from the right of the center agenda.
·
Caste is still relevant in
Indian politics but the manifestation is changing. The electorates are
associating caste considerations more with the candidates rather than the
political parties.
·
Digitalization of governance
has resulted in closer association of leadership (CM and PM) with the
beneficiaries of the government schemes. This trend may continue to benefit the
incumbents for next few years, before it is fully internalized by the voters as
status quo. In this election free ration during the pandemic has done for BJP
in 2022 what MNREGA did for Cong in 2009. But in 2024 it could be the case of Dil
Maange More.
·
Women are becoming a major vote
bank. This is a positive consequence of rising female literacy and gradually
increasing female participation in the labour force. Presently this vote bank
is favoring the ruling parties like BJP, TMC, AAP, DMK and JDU etc. But in
future elections we shall see all parties specifically targeting this vote
bank. The most positive impact of this would be the fading of caste and
religion agenda and rise in inclusive politics.
·
UP has seen mushrooming of sub-regional
parties. It is becoming a replica of national politics of the 1990s. In the latest
elections it was BJP (with 3 sub-regional parties) on one side and 12 sub-regional
parties on the other side. The results indicate that most of these sub-regional
parties may survive and even BSP may become a sub-regional party. This trend
may warrant the splitting of UP into multiple states in future.
·
Post this election, we may see a
material increase in the intensity of efforts to form a Non-BJP, Non-Cong and
Non-AAP alliance of regional parties.
The escalation of the war between Russia and
Ukraine has material implications for the global economy. The global growth
that was anyways slowing down after the effect of pandemic related fiscal
stimulus subsided and central banks have started to withdraw monetary stimulus,
has taken a noticeable hit. Sharp spike in commodity prices, especially food
and energy, is hitting the policymakers as well as the common people.
The Indian economy is also witnessing slowing
growth momentum for the past couple of quarters. Rise in global energy prices
present a formidable challenge to the economy. If the current level of energy
prices sustains for more than a month, the macroeconomic indicators like
inflation, current account deficit, currency, and bond yields will all be
impacted adversely, putting further pressure on growth.
As per the rating agency ICRA—
·
The current account deficit
(CAD) is likely to widen by ~US$14-15 billion (0.4% of GDP) for every US$10/bbl
rise in the average price of the Indian crude basket. If the price averages
US$130/bbl in FY2023, then the CAD will widen to 3.2% of GDP, crossing 3% for
the first time in a decade.
·
If the Centre reinstates the
excise duty on MS and HSD to the pre-pandemic rates, before April 1, 2022,
followed by the budgeted rise of Rs. 2/litre each on unblended fuel in H2
FY2023, we estimate the revenue loss to the Centre in FY2023 at Rs. 0.9
trillion.
·
In addition to the cut in
excise duty, the GoI’s budgeted fiscal deficit would also come under pressure
from high fertiliser subsidy requirements and a hit to direct tax collections
due to elevated margin pressure for corporates. However, modest nominal GDP
growth and tax buoyancy assumptions, and the spillover of the LIC IPO to FY2023
would provide some cushion.
·
Crude oil spike could
exacerbate the impact of higher-than-expected FY2023 market borrowings of the
GoI on yields. We expect 10-year G-sec yield to range between 7.0-7.4% in H1
FY2023.
·
Large downside risks seen to
FY2023 GDP growth forecast of 8.0%, with higher commodity prices to compress
margins during the duration of conflict.
As per Kotak Research, “As mentioned in our
report Crude cost of someone else’s war, an average crude price of US$120/bbl
in FY2023 will (1) cost the Indian economy US$70 bn, (2) increase average CPI
by 80 bps and (3) negatively impact growth.
Edelweiss Research notes, “In the Indian
context, the indirect economic impact of the conflict would far outweigh the
direct fallout in terms of trade flows between India and Russia/Ukraine, which
is low to begin with (around 1.5% for Russia and 0.6% for Ukraine). The impact
would be felt in the real economy and financial markets alike. Furthermore, the
uncertainty and erosion of consumer and business confidence that the crisis
brings along could push back the anticipated revival in private investments.”
Emkay Securities highlights, “Higher oil prices
can impact growth through multiple channels: 1) higher inflation erodes
purchasing power, weighing on consumer demand; 2) lower corporate profit
margins due to rising input costs; and 3) deterioration of the twin deficit,
with government spending capacity being constrained. Crude at $100/barrel and
other commodity shocks in FY23 could shave off up to 80bps of real GDP growth,
which could end up below 7.0%.”
SBI Economics cautioned, “The recent
geopolitical conflict has brought the focus back on government finances that
might be derailed as the conflict intensifies. Against the possible impact on
Government finances, the markets are already apprehensive of a larger
borrowings. The Government has been quick to clarify that it is unlikely to
borrow in March. Beyond this, the RBI does have a host of unconventional
measures to manage Government borrowings in FY23 and it is important that debt
market understands such nuanced undertows and does not get into a frenzy as it
is swirling currently with crude prices threatening to move beyond $120.”
The markets are witnessing the beginning of an
earnings downgrade cycle that may accelerate if the inflation stays elevated
and rates firm up.
Kotak Securities highlights, “Market multiples
appear ‘expensive’ relative to (1) history and (2) bond yields, despite sharp
correction in recent weeks. However, ‘consumption’ stocks may see earnings
downgrades from higher-than-assumed crude prices and lower volumes and gross
margins. ‘Growth’ stocks are trading at expensive valuations and may see
further downside to their multiples; financial stocks, however, are looking
reasonably attractive.”
Credit Suisse has tactically downgraded Indian
equities stating, “Because of its strong structural prospects and robust EPS
momentum, we will look for opportunities to re-enter the market, but today we
tactically cut our India position from Overweight to Underweight. Higher oil
prices hurt the current account, add to inflationary pressures and increase
sensitivity to Fed rate hikes. If Brent crude remained at US$120/bbl, India’s
current account would weaken by almost 3 pp of GDP. The market’s big P/E
premium magnifies the risks.”