Strategy Note /

India: Reform and Illiberalism after Modi's BJP state elections success

  • State elections suggest no prospect of nationally unified and competitive opposition for BJP in 2024 general election

  • After 25 years, BJP retained power in key Uttar Pradesh and opposition Congress seats fell to 15% in Punjab

  • Raises probability of reform (albeit at slow pace, unlike Farmers' Laws) and the irreversible rise of illiberalism

India: Reform and Illiberalism after Modi's BJP state elections success
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
13 March 2022
Published byTellimer Research

India's state elections, concluded on 10 March, suggest there is no prospect of a nationally unified and competitive opposition to PM Modi's incumbent Bharatiya Janata Party (BJP) in the 2024 general election.

Elections for five states legislatures are best summed up by contrasting the BJP retention of power in the key state of Uttar Pradesh and the opposition Congress Party's seat count falling to 15% in Punjab: two events not seen for about 25 years.

As such, these state elections raise the probability of two factors: the resumption of slow economic reform (a positive for investors) and the irreversible rise of illiberalism (a negative).

India state elections suggest BJP faces little risk in 2024

Two consequences: Reform, Illiberalism

Reform returns

The more confident Modi is on re-election in 2024, the more he is likely to grapple again with reform. The resumption of reform efforts, albeit at a slower pace after the failure of the "big bang" Farmers' Laws, is a modest positive for investors.

India incomplete or not-started reforms: Modi's to do list

Illiberalism heads to point of no return

An irreversible rise of illiberalism in Indian politics is a negative for those investors who worry about political sustainability risks or ethical dilemmas. These state elections suggest that the point of no return has been brought closer.

Firstly, the overwhelming success of the BJP and the lack of unity, leadership and organisation among the broad spectrum of opposition parties, as a bloc, means that the Hindu-nationalist narrative will encounter ever fewer empowered dissenters.

Congress party's worst showing in Punjab state for 25 years

Secondly, the rise within the BJP of Uttar Pradesh Chief Minister, Yogi Adityanath (aged 49), as a long-term rival to Modi (aged 71) for charismatic leadership of the party and the shaping of its ideology.

Yogi has consistently engaged in anti-Muslim rhetoric and is accused, by political opponents, of using state machinery and security for political purposes.

Uttar Pradesh still dominated by BJP, with an absolute majority on its own (albeit less than in 2017)

Thirdly, the state legislatures vote in the election of members of the upper house (Rajya Sabha), where the BJP currently has 40% of seats on its own and 49% with partners.

A 66% majority in the upper house would allow the federal government to pass laws on matters usually reserved for states.

In all, 5 out 32 state and federal (union) territories conducted elections over February and March, including Uttar Pradesh, which has the largest voting bloc of all states (13% of seats) — UP is the equivalent of Texas and Florida, or California and Pennsylvania, in US electoral college.

Uttar Pradesh has largest allocation of seats in Parliament

India equities down ytd but relatively expensive

India equities (BSE 500 index) are up 8% in the past 12 months but down 7% ytd, compared to MSCI EM, down 18% and down 12%, respectively. Equities were up about a percentage point after election results started to come through.

India offers exposure to leap-frogging technology, alternative manufacturing location to China, and pro-business reform.

But should monetary policy tighten at any point this year (the real interest rate is negative at -2%) or fiscal policy next (the deficit is over 9%) then risk appetite and the appeal of equities for local investors will shrink.

And India is uncomfortably exposed to the commodity price spike (with net fuel imports equating to over 7% of GDP when oil price is at US$110, and 30% of average household spending is on food).

Forward PB (3.3x), for 13% ROE, is a 22% premium to the 5-year median and forward PE (23x), for 22% earnings growth in 2023, is a 12% premium to the 5-year median. India is more expensive relative to its own history than most large EM peers.

India equities valued on a 12% premium to 5-year median PE

India equities among most expensive vs history in large EM

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