India’s lower house (Lok Sabha) elections have ended after seven phases of polling. Exit polls released after polling ended suggest the BJP-led coalition (the NDA) is likely to return to power with a clear majority (at least 272 seats of 543 in total). On average, polls predict the BJP-led coalition, the NDA, will win 304 seats, down from 336 seats in 2014, but above the simple majority mark of 272 seats. This result (if correct) for the NDA would represent a stronger performance than investors expected (270 seats, according to our survey ‘What Investors Expect—India Election Watch #10, May 14, 2019) and better than opinion polls predicted in early April (about 275 seats).
The principal opposition, the INC-led coalition (the UPA) is predicted to win 119 seats, up from 59 seats in 2014. Other remaining parties are likely to win 119 seats in 2019, versus 148 seats in 2014.
As largely expected, exit polls show that the BJP will be unable to recreate its near-clean sweep of the key state of Uttar Pradesh and is likely to cede ground to the opposition coalition. In the other BJP bastion, ‘Hindi heartland’ states like Madhya Pradesh and Rajasthan, exit polls show that it has recovered from its recent assembly poll losses, and is set to corner a majority of seats. Similarly, despite failing to form the state government in Karnataka in the recent assembly polls, the BJP is looking to secure a majority of parliamentary seats. In the South, as we highlighted in our previous note (‘India Election Watch #4: Understanding the Alliance Chemistry’, March 22, 2019), the BJP’s regional coalition partner, the incumbent AIADMK, seems to have lost out to its regional challenger, the DMK. In the East, the BJP seems to have made impressive inroads in West Bengal and Odisha, offering strong competition to regional heavyweights. Are exit polls to be trusted?
Exit polls correctly predicted the winning party in the 2009 and 2014 elections, but they picked the wrong winner in 2004. In both 2009 and 2014, exit polls underestimated the seat count of the winning party by an average of 60-70 seats (figures 2 and 3). Among the various exit polls, the ones that have historically been more accurate include Today’s Chanakya and India Today-Axis My India.
In the 2019 lower house elections, Today’s Chanakya predicts 350 seats for the NDA (300 seats for the BJP), while the India Today-Axis My India poll predicts 352 seats. The lowest seat prediction for the NDA is 242 seats (by NewsX). If we apply past trends, the NDA would emerge as the winner with a seat share higher than what exit polls predict. However, last minute surprises are always possible and markets will be looking to final counting, which will be released on May 23.
Exit polls have a better track record than opinion polls; and they suggest that, unlike opinion polls in early April, the BJP-led coalition gained momentum and is likely to cross the simple majority mark. However, as exit polls can also be inaccurate, we discuss the likely policy and economic path under three scenarios: (1) the NDA returns with a strong majority, as exit polls predict; (2) the NDA returns with reduced majority (our previous base case); and (3) a non-NDA government (the INC plus third front).
Broadly, if the NDA government returns to power with a clear majority, we would expect policy continuity. Rural reflation, infrastructure spending, streamlining of the goods and services tax, direct tax reforms and the consolidation of public sector banks are likely to be key priorities. Fiscal consolidation is an objective, but will be a challenge in the absence of revenue mobilisation or a growth rebound, implying a likely compromise on the quality of consolidation (less capex, more consumption-oriented spending). Contentious issues like land and labour reforms are likely to remain the states’ prerogative to implement.
In the short term, we do not foresee a major reversal of the current (weak) economic conditions, even if the NDA returns with a clear majority, although the end of political uncertainty and policy continuity will be a medium-term positive. In the short term, the pullback of government and investment spending ahead of elections negatively affected growth, but the combined impact of weak global growth and tighter financial conditions due to the non-bank financial company (NBFC) stress continues to hurt all demand segments. Thus, we expect growth to moderate from 6.6% year-on-year in Q4-2018, to 6.2-6.3% in H1 2019. We are currently pencilling in a modest recovery in H2-2019 with growth likely to inch closer to 7% by Q4-2019, but near-term growth risks remain titled to the downside. Weak growth and inflation within the 4% target should set the stage for a 25bps rate cut at the June policy meeting.
(Excerpted from Nomura Asia Insights Global Markets Research report ‘India: Exit polls predict a clear majority for the BJP-led coalition’ dated May 20, 2019)