On a Fine Edge

Political & Policy Issues to Watch . Storming the Eastern bastion The BJP convincingly won West Bengal’s recent Assembly elections, securing powering in a state long considered out of its reach. With over 45% of the vote, it garnered 207 seats (up from 77 in 2021), in the process supplanting Mamata Banerjee’s 15-year-old government, which had struggled against heavy anti-incumbency pressures. In Assam, the BJP further consolidated its position, improving its count from 69 to 92 seats, again with ~45% of the vote. Having now established a dominant position in the three ‘heavyweight’ Eastern states – including Bihar, where Samrath Chaudhary was sworn in as CM last month, replacing Nitish Kumar – the onus will fall on the BJP to accelerate development efforts across a belt that has historically lagged the rest of India. This may create significant new business opportunities in the next 18-24 months.

Meanwhile, actor-turned-politician Vijay’s TVK won a near-majority in Tamil Nadu, ending a cycle of alternating rule by the DMK and AIADMK that dates back to 1967. The TVK is likely to form a coalition with support from the Congress, the Left and other smaller parties. Finally, in Kerala, the Congress-led UDF replaced the LDF. The BJP’s weak performance in the South again underscored the geographical limits of its reach. At the same time, however, the ‘breaking’ of the DMK-AIADMK duopoly (suggestive of an increasingly fluid political environment) and the TMC’s defeat in West Bengal should worry the opposition as it seeks to rebuild ahead of the 2029 polls.

. A rare legislative failure for the Central government The other key political development last month was a botched 3-day ‘special sitting’ of Parliament. Three linked bills – which were to give effect to the Women’s Reservation Act of 2023 while increasing Parliament’s size to over 800 and redrawing constituencies in line with the 2011 population figures – were voted down. The DMK’s MK Stalin spearheaded the pushback, demonstrating how effective a united opposition can be.

India recently signed a new FTA with New Zealand granting market access for ~70% of New Zealand’s tariff lines to India in return for 100% duty-free access to all Indian exports. The deal also contains provisions for talent and student mobility, as well as for the trade in services. Building on India’s other recent FTAs – with the EU, UK, Oman – this comes in the middle of on-again-off-again negotiations for an Indo-US trade deal.

. Outlook for the Market . The economy – pulling in all directions April saw a recovery in certain headline indicators, continued strength in others, but also a marked weakening in a few places. The PMI indices for both Manufacturing (54.7, up mildly from a 4-year-low of 53.9) and Services (57.9, up 40 bps) regained only a bit of lost ground. However, input costs are clearly on the rise, and with market competition intensifying, few producers are willing to pass these on to customers, impacting margins. The situation will worsen in the months ahead. Even in the (highly unlikely) event of a full peace deal coming into force soon, oil and gas prices will remain elevated, and supplies constrained, for an uncertain duration. IMA’s April BCPI (Business Confidence and Performance Index) survey suggests a steep drop in sentiment, with the headline index dropping to 53.3, an over-9-point decline relative to January, and its lowest reading since mid-2020, at the height of the pandemic. Expectedly, CXOs are feeling pessimistic about the broader economy, but also about sales, profitability, hiring and capex.

Meanwhile, GST receipts (Rs 2.4 trillion, +8.7% YoY) set a new record in April, though this was, as usual, boosted by a year-end mop-up. Auto sales were also exceptionally strong, with passenger vehicles (+12%), two-wheelers (+13%) and commercial vehicles (+15%) all surging. In contrast, exports fell by 7.4% in March (the latest month for which data is available) while imports declined by 6.5%. The April numbers will likely reflect continued declines, especially given the ongoing disruption in major supply routes.

. Inflation is up, foreign investment down Inflation continues to steepen, though not (yet) to intolerable levels. Consumer prices were up 3.4% in March but wholesale prices rose by a faster 3.9%, with fuel and other input prices perking up sharply. On current trends, inflation may approach 5% levels in the coming months, owing to both, the West Asia situation and the likelihood of a poor monsoon, which will hit food yields. (The Indian Met Department currently expects rainfall to come in at 92% of its long-term average +/- 5%, with the agriculturally-crucial North and Central Indian regions likely to receive below-normal rainfall.) With the state elections now done and dusted, retail fuel-price hikes may soon be announced, driving further price pressures. The RBI held its Repo rate steady at 5.25% after its April MPC meet, but there is a growing chance of a small hike later this year.

With foreign portfolio (FPI) investors continuing to withdraw from the Indian markets (-$7.5 bn in April on the back of -$13.6 bn in March), the rupee explored new, sub 95/$ lows in late April and early May. The downward pressure is expected to continue until a definitive resolution to the Iran War is found; a US-India trade deal would be an added bonus.