Political risks not priced in: Nomura
The markets have not fully priced in political risks and there is a 25 per cent probability of the general election getting advanced to 2018, says foreign brokerage Nomura.
“Overall, the outcome of the Lok Sabha election is hard to predict but political uncertainty and noise is set to rise in the next year. Some consideration is needed to be assigned to the Opposition parties, performing better than 2014. We believe these political risks are currently under-priced,” it said in a note titled Political storm gathers on Wednesday.
The Indian markets were seen reacting negatively in the past few sessions to Bharatiya Janata Party's (BJP's) poor show in Uttar Pradesh's byelections. The Telegu Desam Party's exit from the BJP-led National Democratic Alliance coalition, too, had weighed on investor sentiment.
"A series of political developments over the last few weeks had placed the ruling BJP on the back foot. The immediate political threat is trivial, as the coalition still has a majority in the Lower House of Parliament. However, the emerging political vulnerabilities are emboldening both opposition parties and the more vociferous of its allies to become more restive. A ‘grand coalition’ of Opposition parties to challenge the BJP in the next general election seems likely,” said Nomura.
“An early general election in Q4 2018 (instead of the scheduled Q2 2019) cannot be ruled out. The elections could be clubbed with state elections, scheduled in Q4 2018 and first half of 2019, including the key BJP states of Chhattisgarh, Rajasthan and Madhya Pradesh. For the BJP, the advantage would be an ease of campaigning and subduing of anti-incumbency in states like Rajasthan," it said.
The brokerage said the reform agenda was taking a back seat in a tight election calendar.
"From an economic perspective, this suggests big-ticket reforms are less likely and a populist overtone is more likely. As the government raises its pro-farmer, pro-common man profile via higher minimum support prices (MSPs) and fiscal transfers that ensure MSPs are effective, this could increase both inflation and fiscal risks. Given an already negative basic balance of payments (current account plus net foreign direct investment), this could make current account deficit financing difficult," it added.
The Indian stock markets have fallen by 8 per cent from their all-time high in January. Beside global factors, domestic concerns such as banking fraud, slow economic growth and delayed corporate earnings recovery have led to a correction.