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Any loss of popularity for Modi's reforms in Gujarat polls could spell trouble for markets

The polls assume special importance because Gujarat is the home state of Prime Minister Narendra Modi and is BJP’s strongest bastion.

November 21, 2017 / 02:12 PM IST

The next big event which market participants are watching out for is the outcome of the state elections in Himachal Pradesh and Gujarat, with both states going to polls in the month of December.

The polls assume special importance because Gujarat is the home state of Prime Minister Narendra Modi and is BJP’s strongest bastion. The party has been in power there since 1998.

But this time around, most market participants are factoring in fewer seats than usual for the ruling government in the Gujarat polls. Any negative surprise or hint of loss of momentum could have some adverse impact on equity markets.

Gujarat has a large business community, which has been impacted by demonetization and GST. The elections will be a test of the popularity of Modi’s reforms and will also throw up a challenge to the incumbent in power.

The Gujarat Assembly elections will be held in two phases on December 9 and 14, respectively, the Election Commission (EC) announced earlier this month. The first phase will see 89 assembly constituencies hit the polling booths, while 93 of them will vote in phase 2. Counting of votes will take place on December 18.

Most analysts fear that if BJP wins fewer seats in Gujarat than last time, things could get shaky for D-Street. As many as 41 percent of the poll respondents feel that if the current ruling party BJP wins fewer seats than last time, it will hurt market sentiment, while 35 percent dismissed the argument. The remaining 24 percent preferred not to comment.

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The S&P BSE Sensex which has risen nearly 26 percent so far this year, is finding it hard to break above its record high 33,865. Market participants could heave a sigh of relief if BJP manages clean sweep in both the states.

“Markets at current levels are already pricing in a BJP victory to some extent and are likely to trade sideways till the final outcome is out,” JK Jain, head of equity research at Karvy Stock Broking told Moneycontrol.

“Gujarat outcome will be taken as a sample of Modi's popularity at the all-India level and may impact short-term market sentiments, as political stability and the present government's thrust on the economic reforms are the basis for anticipation of long-term bull-run in the markets,” he said.

Jain further added that any negative outcome is likely to have a strong bearing on states such as Karnataka, Rajasthan, Madhya Pradesh and Chhattisgarh, where elections will be held before the 2019 Lok Sabha elections.

The ‘troika effect’:

The Gujarat election is a 2‐party contest with BJP and Congress accounting for 90 percent of the vote share. The state has been BJP’s stronghold with the party being in power there since 1998 with 8‐10% higher vote share than Congress in each of the elections.

However, a few trends have emerged: a) caste politics has perked up with the emergence of new caste leaders (among them Patels, Dalits, OBCs), who are cozying up to Congress. “But, keeping these disparate groups together will not be easy for the grand old party,” Edelweiss Securities said in a recent report.

“Hardik Patel (Patel leader) appears to be a bigger force than the other 2 and could potentially hurt BJP in 10‐15 seats in rural Gujarat (nearly 100/182 seats are rural). And, in urban centres (BJP stronghold), businesses have been hit by GST and activity is yet to regain the previous pace,” it said.

The recent opinion polls indicate that although the BJP could emerge victorious in the upcoming elections in Gujarat, factors such as the lower popularity of reforms such as GST and demonetisation in the state (according to opinion polls), and the emergence of independent leaders could hurt BJP.

“The emergence of the troika of Hardik Patel, Alpesh Thakore and Jignesh Mevani representing the three communities of Patidar, OBC Kshatriya, and Dalit communities respectively along with their popularity amongst the youth is causing uncertainty,” ICICI Securities said in a report.

“BJP has a 9 percent vote share lead over the Congress in the last election but a 5-6 percent vote swing due to the ‘troika effect’ could make the race tight,” the brokerage said.

Kshitij Anand
Kshitij Anand is the Editor Markets at Moneycontrol.
first published: Nov 21, 2017 01:03 pm

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