Assembly elections unlikely to provide the market any clear-cut direction…

State elections are to be held in Chhattisgarh, Madhya Pradesh, Mizoram, Rajasthan and Delhi in November and December.  The polls are taking on a bigger dimension with about 6-8 months to go for the general elections these elections are being viewed as a warm-up before the main event.

The election in Chhattisgarh for 90 seats will be held on November 11 and November 19.  Madhya Pradesh will battle it out on November 25th for 230 seats. Rajasthan goes to poll on 1st December for 200 seats, Mizoram votes on December 4th as does Delhi for 40 seats and 70 seats respectively.  The counting of votes for all the states is on December 8th.

The die is thus cast  – most of these states play a crucial role in determining the future trajectory of Indian politics and this event is now being closely tracked and analyzed.

This is also a landmark election for another reason.  For the first time voters will have option of the right to reject.  The Supreme Court verdict that gives the voter the option to choose ‘none of the above’ will be added in the nation’s ballot machines.  It will be interesting to see how many will use this option to convey their displeasure with the candidates that have been fielded by various parties.

But clearly the elections are being viewed as an indication to which party will have the best chance to form a government after the general elections in the first half of next year.

The ruling Congress party is in a direct fight with the Opposition, Bharatiya Janata Party (BJP), in four out of the five states set to hold elections soon. A good showing by the BJP will give added momentum to Narendra Modi, the prime ministerial candidature.  On the other hand a reasonable showing for the Congress would be a saving grace.

Madhya Pradesh and Chhattisgarh have a BJP government, for the past 10 years, but the Congress has still not exploited the anti-incumbency factor.  In the other 3 states there is a Congress government.  Of these, opinion polls suggest that it will be a loss for the Congress in Rajasthan.  In Delhi however, where Chief Minister Sheila Dixit enjoy popularity, the Congress have a good chance.

The market is clearly gunning for a change.  That opinion seems to find echo in a lot of brokerage reports – overall the disenchantment with the ruling party for a variety of reasons, economic reforms, growth, regulatory roadblocks, scams, all have eroded equity optimism over the past 3-4 years.

The opinion on whether the state election results will have a bearing on the general elections is however divided.  In 2003 the BJP-led National Democratic Alliance (NDA) swept a slew of state elections. But general elections just a few months later threw the party out of power in Delhi.

But things this time round could well prove to be different. One analysis of the state elections predicts a larger alliance of non-BJP parties if the BJP is victorious in the assembly. Already, the Congress leadership and the Communist Party of India (Marxist) or CPI(M), have called for the coming together of all secular forces. The Left is today not the formidable force that they were in 2004. So even if this alliance form before the general elections it may not have the same effect as it did in 2004. Also if the BJP does indeed get 3-4 out of the five states and the general elections are announced in the May-Oct 2014 period then the state ruling party will still be in their ‘honeymoon period’ and voters would stay with the same party.

It is too early to predict the result.  The best case seems to be 3 out of 5 at this point in time in favor of the BJP, if that is done markets may not be enthused, if they get anything more than that it would definitely signal in the winds of change that could carry markets higher.  But, anything less would put uncertainty back.

FII flows, which in turn are fluctuating with the jitters of an early QE tapering, are still the biggest factor that will drive markets.  But election results could provide a building block for how market participants could view the markets in the run-up to the main event.

Whatever be the outcome the state elections in November-December will be an important landmark on the road leading to the 2014 elections.


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