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

The crisis brewing in emerging markets
Emerging markets

The crisis brewing in emerging markets

Covid-related political unrest and financial collapse in the developing world are the biggest threats right now, says Matthew Lynn.
25 Jul 2021
A new revolution in Cuba?
Economy

A new revolution in Cuba?

The biggest protests in decades have rocked the one-party communist state. But is change for the better really on the cards?
24 Jul 2021
Can Latin America's economies recover from the pandemic?
Emerging markets

Can Latin America's economies recover from the pandemic?

Few places have suffered as much from the Covid-19 pandemic as Latin America. A sustained commodity rally could help.  
23 Jul 2021
The five best ways to invest in India's promising future
Emerging markets

The five best ways to invest in India's promising future

The pandemic has been catastrophic for India, yet the stockmarket is hitting record highs. Investors are right to remain optimistic about the long ter…
23 Jul 2021

Most Popular

The MoneyWeek Podcast: Asia, financial repression and the nature of capitalism
Economy

The MoneyWeek Podcast: Asia, financial repression and the nature of capitalism

Russell Napier talks to Merryn about financial repression – or "stealing money from old people slowly" – plus how Asian capitalism is taking over in t…
16 Jul 2021
Why the UK's 2.5% inflation is a big deal
Inflation

Why the UK's 2.5% inflation is a big deal

After years of inflation being a financial-assets problem, it is now an “ordinary things” problem too, says Merryn Somerset Webb. But central banks st…
16 Jul 2021
Three companies that are reaping the rewards of investment
Share tips

Three companies that are reaping the rewards of investment

Professional investor Edward Wielechowski of the Odyssean Investment Trust highlights three stocks that have have invested well – and are able to deal…
19 Jul 2021