Nitish Kumar, Narendra Modi

When Chief Election Commissioner (CEC) Nasim Zaidi called the upcoming Assembly polls in Bihar the “mother of all elections”, he wasn’t indulging in hyperbole. For, even before he could announce the specific dates for the polls to be held in September-October for the state Assembly’s 243 seats, political parties have started their fierce campaigns.

On Friday, Prime Minister Narendra Modi will address his first rally for the state election at Muzaffarpur, the so called capital of North Bihar. Chief Minister Nitish Kumar has already taken lead with his knock-on-door campaign.

Another set of players – the leading lights of the market — also agree with Zaidi’s observation and are keenly watching whether the Delhi election results were just a one-off setback for Modi’s political juggernaut. There is a solid reason for their anxiety — investors, both domestic and foreign, have pumped in nearly Rs 70,000 crore in the six months following the announcement of the 2014 election results. This is possibly the highest ever for any six month period after general election results in India. The Sensex, the benchmark index of the Bombay Stock Exchange has gained about 17 per cent in this period to 27,865 at the end of October. It has gone past 28,000 since then.

“Bihar election is important simply from the context of whether the Modi government still enjoys popular mandate or not,” says Shankar Sharma, vice chairman and managing director at First Global. Bihar and UP were majorly responsible for Modi’s thumping victory in the 2014 elections as these two states added about 100 seats to the Bharatiya Janata Party’s National Democratic Alliance’s total tally of 282 seats.

Since then, the electoral map has changed with a unified opposition flexing its muscles. Arithmetically, it now looks difficult for the NDA to repeat the Lok Sabha performance because they were in low thirties in terms of percentage vote share and managed to get an overwhelming number of seats because the opposition was then fragmented. “So if they (NDA) get the same vote share they got in 2014 contest, they are not going to come back. And if they are wiped out in these elections or it is a poor show, you can be very certain that in 2019 there will be a new government in the Centre,” says Sharma who now works from his Dubai office but traces his roots to Patna in Bihar.

Raamdeo Agrawal, managing director and co-founder, Motilal Oswal Financial Services, says “Today it looks like it can tilt either side, so the market is neither hopeful nor is it ready for a huge debacle like in Delhi.” The BJP-led NDA is broadly united in Bihar while the opposition is broadly disintegrated, they are together just to face the BJP as no one trusts the other. It will be a very interesting fight,” says Agrawal.

But what most market players are more interested in is whether the NDA would be able to strengthen its position in the Rajya Sabha where it lacks majority and has been facing opposition to its critical reform agendas. The NDA currently holds 60 seats in the 245-member Upper House and the Bihar election is critical as before its current terms ends in 2019, 11 Rajya Sabha seats will be coming from the state for re-election in the next 3 years which is the third largest after 21 from UP and 12 from Maharashtra.

“Reform process in Parliament has stalled as is evident from land acquisition amendment being put on ice. Unless the NDA has a reasonably positive result out of the Bihar election, it is highly likely that the reform process will come to a halt,” says Saurabh Mukherjea, CEO institutional equities at domestic brokerage Ambit Capital. He is expecting 5 per cent impact on the Sensex, either side based on the Bihar election result.

But Gautam Chhaochharia, head of India research at the Swiss bank UBS thinks differently. “The bigger question for investors is whether any loss in Bihar election or even longer term loss in the UP election will lead to the government changing its stance or not,” he says. “Political economy dictates that India needs to control inflation and revive growth and that is going to stay in my belief,” says Chhaochharia.

Neelkanth Mishra, India equity strategist for another Swiss bank, Credit Suisse, also believes that investors need to look at Bihar election with a lens that sees beyond the Modi government’s ability to spruce up its strength in the Upper House. He has been meeting investors around the world with a map of India that shows its 29 states with the name of countries it resembles in terms of population to drive home the point how improving governance in these country-sized states will impact the Indian economy.

Uttar Pradesh houses more people than Brazil (another member of BRIC) while Bihar resembles Mexico, says Mishra. Of the sectors that usually drive the investment cycle, many, like power generation as well as metal and cement production, are suffering from over-capacity and may not need fresh investments for several years. On the other hand, some large sectors that desperately need more investment, such as power distribution, low-cost housing and urban infrastructure, are state subjects. The total state government spending is already 65 per cent more than central government spending and is still growing, he adds.

So what is most important in this election is to have a stable state government that lasts for five years. A dramatic improvement in state-level governance, likely driven by changing voter demands and enabled by technological advances like cheap computing, mobile telephony and the internet, is afoot. This has all the signs of a structural change and holds great promise for India in the coming years.

”BJP is not a monolithic party, so what happens in Bihar can impact the current leadership’s influence over the party,” says Mishra who also traces his roots to the poll bound state.


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