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Wednesday, August 27, 2014

The importance of the upcoming state elections – a guest post

Almost every one had expected the Modi-led NDA to do well in the general elections held during Apr-May ‘14. But the thumping majority of NDA’s victory came as a complete surprise. Expectations from Modi’s government went sky-high. The stock market celebrated by regularly touching new highs.

Of late, there have been some murmurs of disappointment and discontent – both among domestic and overseas investors - about the lack of any major reforms announcements from the Modi government. It seems like the government is taking the path of incremental improvements of the existing system of working.

Perhaps, the failure to pass the insurance bill has necessitated this cautious approach. In this month’s guest post, Nishit gives his opinions on why the Modi government is proceeding with abundant caution instead of trying to bulldoze its way through with major policy reforms.

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The Modi Government was elected with a huge majority and it has been in power for nearly 100 days. The Government has made some progress but is treading lightly. Let us try and explore why, and what could be the road ahead in the next few months.

First of all, change is going to be gradual. The big-bang approach rarely works. India is world famous for the best of rules and regulations but compliance is very low. If compliance rate is fixed, most of the problems disappear on their own.

Second, the Government enjoys a big majority in the Lok Sabha, but in the Rajya Sabha it is badly in a minority. To pass any bill, it has to be passed in both houses to become a law. The other option is a Joint Session of Parliament where both Lok Sabha and Rajya Sabha sit together and a simple majority is needed.

Another option is asking other regional parties to support the passing of any bill, which itself becomes an issue because these parties may demand their own pound of flesh.

The best option therefore lies in having a majority in the Rajya Sabha also. The members of the Rajya Sabha are elected from the various States based on the respective party strength in the Vidhan Sabha of each state.

Now, the 4 States in which elections are going to be held soon, are Maharashtra, Haryana, Jharkhand and J&K. BJP has not been in power in these States for many years now. The elections will be held some time in October-November 2014. So, any aggressive reforms now may upset the applecart of the state elections. These elections become even more significant as they will be the first major test of Modi’s popularity after the general election.

This is the reason BJP is playing safe, and the stock market is buoyant but not too exuberant. A positive result for the BJP, at least in Maharashtra and Haryana, will send the market skyrocketing; else we may see the much awaited 10-15% correction from the top.

From now to November is the time to wait and watch, accumulate good quality stocks and enjoy the bull ride. Be prepared for stock prices to fall after you have bought them. Hence, the lineage of the stock is most important.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan. You can reach him at nish.stockid@gmail.com)

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