Pathetic Performance of Scam Scarred Congress in Assembly Polls – Impact on Markets

The Corrupt / Scams scarred Congress Party headed by Rahul Gandhi fared poorly in elections in five states. Ok, Congress and Rahul maybe in denial mode, but Data has proved they are no more a reckoning force so lets analyze what are the Possibilities of Finance Minister Pranab Da taking the reforms forward or Pranab Da taking the negotiations with regional parties to save the Paralyzed Government.

We had already analyzed and tweeted that Indian Markets were anticipating Reciprocal support of Congress and Samajwadi Party in State & Center. However, SP had a Cake Walk in Uttar Pradesh and SP may not come to the rescue of Congress @ Center.

Policy Reforms Impact Post UP / Assembly Elections
Theory-1: The immediate consensus reaction is that these results will trigger a wave of populism from the Congress government at the center. Given the state of India’s fiscal deficit, weak balance sheet and next general elections are another 24 months away this may not happen immediately. [ The Pulse of the Voter is that he wants Job, better Infrastructure, etc and not the stupid Rural Employment Guarantee Scheme]

Theory-2: Recent results could trigger a concerted effort to consolidate the fiscal deficit and raise growth through development so that social spending becomes more viable in 2013 ahead of the 2014 general elections. Congress will face an uphill task in pushing the reforms (increasing diesel prices; re-introducing FDI into multi-brand retail, introducing the Pension reform bill, the land acquisition and mining bills), without conceding a veto to any of its current alliance partners.

Finally, the Editors 2 Cents from his experience, history tells that Congress has always taken recourse to populism when in dire straits and empties the Nation’s Coffers leaving little room for the forthcoming Government to do any progressive work but spend years on refurbishing the deficits and repairing the Balance Sheet.

Mid-Term Polls a Bad Idea
Strong Performance of Regional Parties opposed to the Congress with Big Swing of Votes in their favor – SP in Uttar Pradesh, TMC in West Bengal, AIADMK in TN, Nitish Kumar in Bihar, Patnaik in Orissa etc may push for midterm polls to capitalize on fresh mandate which maybe a difficult coalition to run with progressive policies / reforms.

Where are the Markets Headed ?
The market is likely to be range bound as it faces another couple of key events in the form of the budget and the monetary policy in the coming days. Economic revival gains that the market has started factoring in – could be challenged. If so, sectors most impacted would be Financials, Capital goods rate and other investment / rate cyclicals; and defensives will be back to dominating. If on the other hand the Government uses this as an opportunity to change its agenda into a more reform minded one – then the leaders of the YTD rally: Financials, Cap goods and other investment-driven themes, would continue to run.

The Budget – 10 days from now – will better determine the direction of the market though in the past Pranab Da has stayed away from introducing fresh policies in Budget and has taken decisions outside the Parliament.