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Will Delhi poll outcome dent reform hopes?

With the Delhi Assembly election now over, the markets are expecting the next leg of reforms to be unveiled in the coming Union Budget; these might provide the trigger for another round of rally. After the BSE Sensex lost nearly 500 points in a knee-jerk reaction ahead of the Delhi polls, there was some recovery, albeit partial, after the actual event.

While most market participants are keeping an eye out for the government’s reform blueprint in the Budget, the question is whether the victory of the Arvind Kejriwal-led Aam Aadmi Party (AAP) in Delhi will unite the opposition parties and impede reforms.
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The Narendra Modi-led National Democratic Alliance (NDA) has a clear majority in the lower house of Parliament, but counts on opposition parties’ support in the Rajya Sabha to get key legislation cleared. Of the 240 members of the Rajya Sabha, Delhi sends three — all at present from the Congress. Had it not been for AAP’s decisive victory, these seats would have gone to Modi’s Bharatiya Janata Party (BJP) and helped it improve its upper house tally. Experts now say elections in some other states — Bihar in the second half of 2015, and Tamil Nadu and West Bengal in the first half of 2016 — will be key to deciding the face of BJP’s Rajya Sabha representation.

So far, the NDA government has had to resort to the ordinance route for reforms.

The road ahead

What might the future hold for the government’s reform measures? Will the coming Union Budget give the aam aadmi more sops, despite an urgent need to curtail expenditure and maintain fiscal prudence? The mandate in Delhi, experts say, is in part against corruption and for clean governance, and the AAP was successful in projecting itself as the champion of these ideas. So, BJP’s loss in Delhi could be an exception rather than a trend. On the other hand, the AAP has also promised lower electricity bills, free basic water supply and other measures that might be classed as populist.

“There are fears in some sectors that all this might push BJP to also renege on fiscal reforms that will require spending cuts on misdirected subsides and welfare schemes. However, in our view, the Budget is likely to reveal whether BJP will turn populist or stick to the fiscal discipline; our bias is the latter,” Nomura’s Sonal Varma and Aman Mohunta says in a report.

Ambit Investment Advisors Managing Director Vaibhav Sanghavi expects the markets to remain volatile till presentation of the Budget, as expectations from the event and disappointing corporate earnings for the December quarter get built in.

Analysts at Nomura suggest the reforms like foreign direct investment in insurance, coal auctions, and sale of stakes in public-sector banks, all national-level issues, are unlikely to be affected by the outcome of the Delhi elections.

“For others, such as goods & services tax, vetting the ordinance on land acquisition will require bringing other parties and state governments on board. All said, the key to the reform process will be how BJP manages in the Rajya Sabha, where it does not have a majority which might again prove a bottleneck in passing legislative reforms,” the report adds.

While history suggests the Budget’s influence on short-term market performance is declining, Ridham Desai, India Strategist at Morgan Stanley, says expectations (measured by pre-Budget performance) are still important in deciding what the market does after the Budget. The upcoming Budget, he believes, could be the most important one for the stock market after the early 1990s, when India launched economic liberalisation.

“Our analyst team expects it to be positive for Cement, Financial, Hotels, Internet and e-Commerce, Media, Metals & Mining, Oil & Gas, Real Estate, Telecom and Utilities,” he says.

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