Wednesday, October 07, 2015

Bihar Elections - Why are they important for an Investor in India

Executive Summary
India will see the State Assembly elections in Bihar in late October with results announced on November 8th.
This election is crucial as allows the ruling party at the Center (BJP) gain seats in the Upper House 
of the Parliament "Rajya Sabha" , where they are lacking majority. 

A BJP win would ease passing of any new legislation, (key bills were blocked in the Rajya Sabha) and hence markets would view this as a positive event, and Indian Assets (Stocks, Rupee, Bonds - Government and Corporate) would rally.
Needless to say, if the opposite happens, markets would expect slower pace of reform, and it is negative for Indian Asset prices.

The elections are too close to call, given 3 other major parties (JDU, RJD, INC) have united to form a Grand Alliance ("GA" or "Maha Gathbandhan")
In the 2014 General Elections, though BJP (+allies) had around 35% vote share, they managed to win 31/40 seats in a 4 horse race.
Now that other groups have united, it remains to be seen if electoral math is like simple arithmetic.
Also in a 2 horse race, a small change in vote share will lead to a large change in number of seats (e.g. getting 51% votes in all constituencies, would lead to winning 100% of the seats, though the win is only by 2% in vote difference)

What would I do to hedge:
with the rally in markets, volatility is cheap, and there is good value in buying NIFTY options (OTM puts) or USDINR calls

In case of a BJP win, if INR strengthens, RBI most probably would intervene to prevent excessive strengthening. 
While Equity markets though wouldn't see any intervention, the reaction could be a lot more 

For those who want more detail on the subject

What is Bihar? 
Bihar is the 3rd largest Indian State by population (104 million people) and 13th largest by area. Also one of the most backward states, with the lowest levels of per capita income and literacy among the major Indian states.
Its importance can be gauged by the fact it sends 40 Members of the Parliament "MP"s to the Lower House ("Lok Sabha") and 16 MPs to the Upper House "Rajya Sabha"
(Disclaimer: the author hasnt ever been to Bihar nor has any plans of visiting in the immediate future)
Also among other things, it is where Buddha attained enlightenment. 

Then why is it important for an Investor? 
Bihar is up for elections (Oct to Nov 5th, with the results on Nov 8th).
This election is a litmus test for Prime Minister Modi's ruling party ("BJP"), against the Grand Alliance "Maha Sangathan" comprising all major opposition parties in the region (JDU, RJD and INC) which have united against BJP.
Bihar is crucial, as a victory in Bihar would allow BJP to gain crucial seats in the Rajya Sabha in 2016. (Rajya Sabha members are nominated on the basis of the percentage of seats won by the parties in the State elections)
At the moment the BJP lead ruling coalition ("NDA") has a majority in the lower house "Lok Sabha" of the parliament, but major bills being pushed by them like the Goods & Service Tax (GST) or the amendment to the Land Acquisition Bill, have been blocked by the Upper House.
If BJP wins Bihar, it would have a lot smoother time, without key legislation being blocked. 

If BJP loses Bihar, this would mark the end of "Modi wave" which saw BJP win 4/5 states post the General Election in 2014.
By losing Bihar, and no major elections in 2016, only hope of Modi gaining majority in Upper House would be in 2017, and thus limiting the ability of passing any difficult reforms.
In terms of markets this is a digital event. 

Modi wins -> boost to investor confidence and indian asset prices, 
Modi loses -> negative sentiment for indian asset prices. Probably BJP government turns a lot more populist. Then we see more stagflation. 

What does the Electoral Math look like? 
While in 2014 General Elections all the 4 groups contested separately, and while NDA (BJP lead coalition) had about 35% votes, in a 4 horse race, they managed 31/40 seats.

This time round given the 3 major opposition groups have combined forces, simple arithmetic would suggest a win for them. (Ignoring other fringe groups)

Though given the fact that one of the three (Indian National Congress) is a non entity, and hasnt won an election in Bihar since 1990, the other two (Rashtriya Janata Dal or "RJD") and Janata Dal (United), "JDU" have been bitter rivals in the last decade, and were hurling insults at each other. 

"Will voters see this as opportunism or pragmatism."
Thats the 2 trillion dollar question (size of India's GDP)

Getting into caste, religion, and other local agenda is beyond the scope of this blog, hence I leave you with a few links if you want to expand your reading 

Wikipedia isnt a bad place to start,_2015

Milan Vaishnav of Carnegie Endowment has a comprehensive piece

Karthik Shashidhar in Livemint - why Bihar elections are too close to call

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