The correlation between economic performance and the party in power is historically quite weak, a new Moody’s report notes. What could be a bigger influence is the state of the global economy…
A new Moody’s report argues that the biggest event on India’s political calendar this year will be neutral at best for the country’s creditworthiness—although, at worst, it could heighten existing risks. India’s national election, due before the end of May, is dominating the country’s newsstands, and has put a freeze on many major policy and investment decisions. Perceptions that the Bharatiya Janata Party’s popular prime Ministerial candidate, Narendra Modi, is pro-business have buoyed Indian stock markets even as corporate earnings have disappointed.
But the New York-based credit-ratings agency says the contest between the governing Congress party and the BJP will hardly be decisive for India’s economic prospects. A strong showing by either of the two major parties “would not be a near-term game changer,” it says in the report. The correlation between economic performance and the party in power is historically quite weak, it notes. What could be a bigger influence is the state of the global economy. Factors such as the budding recovery in the U.S. and Europe, the shaky economic outlook in China, and the Federal Reserve’s withdrawal of monetary stimulus will continue to buffet India and many other big emerging markets.
Meanwhile, a messy election outcome — in which a coalition of unhappy political bedfellows forms a Government without clear policy mandate — would heighten investor concerns, Moody’s says. India has become highly dependent on foreign capital, fleet-footed portfolio investments in particular, to finance its imports. “If policy uncertainty brought about by a fragmented coalition were to lead to accelerated capital flight, thereby triggering a spike in borrowing costs and a further sell-off in the Indian rupee, this would be credit negative for the sovereign,” Moody’s said.
While markets have been upbeat about the formation of a BJP-led Government, Moody’s says fiscal consolidation might prove extra-tough if a minority Government is formed. Continued stress at Indian state-run banks could contribute further pressure to Government finances. These lenders account for about 70 per cent of the banking system’s assets—and a disproportionately high share of nonperforming loans. State banks’ high exposure to infrastructure and steel firms, which have been among the worst hit by the economic slowdown in India, means they could require expensive Government recapitalisation if macro headwinds keep blowing. “A worst-case scenario of policy uncertainty and a prolonged economic slowdown could force public-sector banks to turn increasingly to the Government,” Moody’s says, “at a time when the Government’s fiscal position is far from healthy.”