The end of Modi’s honeymoon

Indian prime minister Narendra Modi has suffered a serious setback in Dehli's state election.

Indian prime minister Narendra Modi's "aura of invincibility" has been shattered, says reuters.com. After a resounding national election victory last May and three wins in state elections since then, Modi's BJP party won a mere three out of 70 seats in the state of Delhi last week. All the rest went to a populist, anti-corruption group called AAP.

Some investors fear that the defeat could prompt the government to backtrack on the platform on which it was elected. After all, Modi's government, "despite lots of encouraging announcements", has yet to push through many of the promised "big economic or legislative reforms that would encourage investors to pour capital into India", says The Economist.

India's annual growth rate has slowed to around 5.5% from over 7% a few years ago, and structural reforms are needed to lift the economy's speed limit. Further foot-dragging would be bad news.

Still, that seems unlikely. While Modi's honeymoon is certainly over, this result does not "translate into a wider rejection of BJP by India", says Mizuho Bank's Vishnu Varathan. Delhi is a small state and the AAP party is based there; while it has managed to bounce back from being steamrollered by the BJP in the general election, it has yet to articulate a clear national agenda.

If anything, this result should prompt the government to redouble its efforts to get reforms passed and ensure growth has risen by 2019, when the next national election is due, says R Jagannathan on forbesindia.com. Importantly, the result has no impact on the government's position in the legislature.

It has a majority in the lower house of parliament but none in the upper house, where Delhi's three seats remain out of its hands. It won't be able to muster an overall majority until 2016, when 75 seats become available. So ultimately the key factor remains "how Modi manages his relationship with the upper house", says Shuli Ren on barrons.com.

Keep an eye out for the annual budgeton 28 February if you want to gaugehow hard the government is pushing reforms, says Jagannathan. All the changes Modi wants must be prioritised:a rise in the foreign investment capin the insurance sector, easing restrictions on large industrial projects acquiringland and a uniform nationwide rate of VAT. This could be the most important budget since deregulation began in the early 1990s.

Recommended

I wish I knew what an emerging market was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what an emerging market was, but I’m too embarrassed to ask

This week's “too embarrassed to ask” explains what emerging markets are, and why you might want to invest in them.
9 Sep 2020
Bullish investors return to emerging markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Beware the hidden risks when investing in emerging markets
Investment strategy

Beware the hidden risks when investing in emerging markets

Emerging markets look cheap compared with developed countries, but earnings may be less trustworthy.
23 Dec 2019
Emerging markets: buy when the news is bad
Emerging markets

Emerging markets: buy when the news is bad

Emerging markets are being squeezed by local turmoil and by more general factors. But bad news can spell opportunity for investors.
5 Nov 2019

Most Popular

Here’s why you really should own at least some bitcoin
Bitcoin

Here’s why you really should own at least some bitcoin

While bitcoin is having a quiet year – at least in relative terms – its potential to become the default cash system for the internet is undiminished, …
16 Sep 2020
Will a second wave of Covid lead to another stockmarket crash?
Stockmarkets

Will a second wave of Covid lead to another stockmarket crash?

Can we expect to see another lockdown like in March, and what will that mean for your money? John Stepek explains.
18 Sep 2020
James Ferguson: How bad data is driving fear of a second wave of Covid-19
UK Economy

James Ferguson: How bad data is driving fear of a second wave of Covid-19

Merryn and John talk to MoneyWeek regular James Ferguson about the rise in infections in coronavirus and what the data is really telling us.
17 Sep 2020