Political Corridor

The battleground

March 20, 2013

Major economic decisions

Diesel price decontrol FDI in retail FDI in aviation FDI in broadcasting carrier services raised from 49% to 74% Setting up Cabinet Committee on Infrastructure (CCI) Banking Law Amendment Bill Accelerated disinvesestment process

Parliament formation post 2009 elections

UPA Congress TMC DMK NCP SP BSP Others 206 19 18 9 22 21 18 NDA BJP JD(U) Shivsena SAD Others 114 20 11 4 3 Others Left Parties BJD AIADMK TDP RJD Others 24 14 9 6 4 21

Analysts name Sanjay Manyal sanjay.manyal@icicisecurities.com

In the last six months, there has been a sense of urgency on part of the government to take major economic decisions. These range from diesel price de-control, allowing FDI in retail & aviation, formation of a Cabinet Committee on Infrastructure (CCI) to streamline project clearances. This visible rush can be well understood as a threat of downgrade by rating agencies looms large. On similar lines, Budget 2013 is considered to be a sensible one in an election year with moderate increase in subsidies and ambitious disinvestment target, which could help the FM to curtain fiscal deficit to 4.8%. However, the political impact of a non-populist Budget in election 2014 needs to be seen. What led to 2009 win: social spending or economic boom? It has been debated many times that the 2009 win of the UPA has been mainly due to the excessive social spending through NREGA, loan waiver, etc. However, a second opinion on this has been the five years of consecutive growth, which led to this victory. Still, governments focus between 2009 and 2012 was on continuance of this extra spending in welfare schemes. It is more than clear now that stimulus provided at the time of 2008-09 financial crisis has led the expansion in the economy between 2009 and 2012. However, this sowed the seeds of the current crisis as artificial boost in demand amid supply side constraints led to the high level of inflation in the economy. DMK withdraws support: Race begins for 2014 We are in the last leg of this five year term of the UPA-II government and preparations for 2014 elections have started. Despite the DMK withdrawing support, the government has comfortable numbers on the floor of the House. However, the reduced majority could again result in a slowdown in decision making and the reforms process. Congresss succession plan for 2014 It is important for the Congress to decide their PM candidate for 2014 elections as it would be difficult for the party to go for elections without a face. With the elevation of Rahul Gandhi as vice president of the party, it could be a possibility that he chooses to remain a kingmaker. Narendra Modi: Is he the best bet for BJP? Though BJP is going through its own crisis on multiple faces for the top post, Narendra Modi remains the partys best bet to improve its tally in 2014 elections. His record as chief minister of Gujarat in the last 10 years has made him the development face not only in political circles but also in corporate world. However, keeping the current allies and including other political parties in NDA would be a big challenge for the BJP under his leadership. AAP: will it dent BJP more than Congress? Aam Aadmi Party (AAP) has announced its plans to enter politics & started taking important leaders to task by revealing dubious deals between the corporate world and important politicians. We believe AAP would dent the core vote bank of BJP & NDA, which is middle class, urban Indians & traders. This would indirectly benefit Congress rather than other political parties. Who is the boss in NDA? The biggest question before of NDAs leadership is who would be the PM candidate in 2014. There are different voices within the NDA. Nitish Kumar has already shown his resentment towards Narendra Modis candidature as Prime Minister. Even the Shiv Sena has supported Sushma Swarajs candidature. We believe it would be important for the NDA choose its face before 2014 to get the maximum benefit.

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Assembly elections 2013

Five major state elections in 2013 There are major state elections due in five states like Karnataka, Madhya Pradesh, Chhattisgarh, Rajasthan and Delhi. In all five states, Congress and BJP are in a straight fight. Karnataka, Madhya Pradesh and Chhattisgarh are ruled by BJP whereas Rajasthan and Delhi are ruled by Congress.
Exhibit 1: GDP growth in BJP ruled states
20.0 15.0 10.0 5.0 0.0 FY06 FY07 MP FY08 FY09 Karnataka FY10 FY11 Chattisgarh FY12

Exhibit 2: GDP growth in Congress ruled state

14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 FY06 FY07 FY08 FY09 FY10 Delhi FY11 FY12

Rajasthan

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

Previous Assembly Results (in 2008)

Chattisgarh National Parties BJP BSP INC Delhi National Parties BJP BSP INC Karnataka National Parties BJP INC JD(s) MP National Parties BJP BSP INC Rajasthan National Parties BJP BSP INC Contested 200 200 200 Contested 228 228 228 Contested 224 222 219 Contested 69 70 70 Contested 90 90 87 Seats (90) Won 50 2 38 FD 0 83 1

Seats (70) Won 23 2 43 FD 4 49 1

Seats (224) Won 110 80 28 FD 31 11 107

Seats (230) Won 143 7 71 FD 7 182 20

Seats (200) Won 79 6 96 FD 7 182 20

FD: Forfeited deposit

Chhattisgarh: mixed governance report card In the second term for Raman Singh as Chhattisgarh CM, it has been a mixed bag for the government. On the one hand, the government has been appreciated for its food subsidy schemes but criticism over handling of Naxal problems and creeping corruption allegations have eroded some credibility. However, in the last seven years, Chhattisgarhs GDP has grown at an average of ~9%, which keeps it one of the fastest growing states in India. We believe despite some negative voices, the Raman Singh government still has a fair chance to win the 2013 assembly elections. Delhi: Will it be fourth term jinx for Sheila In the last 15 years, Sheila Dixit must be facing the toughest challenge and surprisingly this has not been posed by a major opposition party in the state. Aam Aadmi Party (AAP) and Arvind Kejriwal have been major threats for not only the government in the state but also for the Opposition Party. The kind of popularity AAP has gained in Delhi has been exceptional for a new party. Whether this popularity gets converted into votes or not that has to be seen in November-December, when assembly elections take place. Karnataka: Pain for BJP The recent civic poll results were a disaster for BJP as it has been placed third after Congress and the JD (S). These results could alter the equations in assembly elections in the state in May-June 2013. BJP remains a divided house in the state as Yeddyurappas newly launched KJP cut the important Lingayat community vote. MP: Another bastion for saffron party The second term for the Shivraj Singh Chauhan government has been going rather well considering the CM enjoys popularity within the state and his efforts towards economic growth and social welfare have got appreciation even outside. The GDP of the state has grown at 8.0% in FY11 and 12.0% in FY12 and an average of 8.9% between 2006 and 2012. Rajasthan: popularity eroding day by day The first term of the current government has been full of controversies. Whether it is the corruption charges against Chief Minister Gahlot or accusations of favouring the first family in land grabbing, the noise in the state has certainly not been very encouraging for the present government. Rajasthans GDP has grown at an average of ~7% in Gahlots regime.

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General Elections: Full of uncertainty

The market has always given thumbs up to a solid formation of government with either Congress or BJP taking centre stage and given thumbs down to a fractured mandate in Lok-Sabha. The current political scenario is full of uncertainty with Congress losing popular support with three years of noise about scams, government deficit and economic woes. However, the difficult part is one national party is losing popularity while the other is not gaining, which could result in a hung Parliament in the 2014 general elections. Congress: Still in a comfort zone Despite major loss of popularity, the comfort for the Congress comes from its presence in more number of states than any other political party in the country. So, even if the Congress lose 40-60 seats from the current tally of 203, it would end up with 140-160 seats (with 141 seats in 2004, it has formed a government at the Centre). However, that could be another fractured government with many alliance partners. Possibility of smaller parties co-existing with the Congress is more than that with any other party. Considering political compulsions for political parties taking tough economic decisions would be a difficult task. BJP: Maths does not add up To see the NDA back in government in 2014, the BJP needs to win at least greater than 160 seats in the Lok Sabha and add more partners in the NDA However, the maths does not add up for the BJP. We have analysed all states where BJP is either No. 1 or No. 2 and even in the most optimistic scenario (it wins in all states), it would reach ~160. Also, garnering more than 110 seats from allies would be an extremely difficult task.
Exhibit 3: State wise performance of BJP in 2009 Lok Sabha Elections
State Karnataka Madhya Pradesh Gujarat Bihar Chhattisgarh Uttar Pradesh Maharashtra Jharkhand Rajasthan Assam Other States India (Total) Contested 28 29 26 15 11 71 25 12 25 7 186 433 Won 19 16 15 12 10 10 9 8 4 4 9 116

Source: Company, ICICIdirect.com Research

A fractured mandate imminent With the ruling party losing ground and the main opposition party not gaining much, 2014 elections could see an extremely fractured mandate. However, the Congress still attracts smaller parties and the possibility of their co-existence with the Congress is larger than any other party. The fractured mandate could possibly bring a similar phase like 1996-1998 with smaller parties gaining momentum and decision making undergoing a paralysis. We believe major economic decisions under that kind of a government would be challenging. That could again get thumbs down from the markets in 2014.

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Pankaj Pandey

Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC Andheri (East) Mumbai 400 093 research@icicidirect.com

pankaj.pandey@icicisecurities.com

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