Feb. 20 (Bloomberg) -- An alliance of regional parties in India is eyeing power in the general election due by May. That’s rattling some of the nation’s companies.
Eleven disparate groups holding 17 percent of parliamentary seats formed a bloc this month to pass legislation, a precursor to a possible alternative to the ruling Congress and the main opposition Bharatiya Janata Party. Moody’s Investors Service warned last week that any so-called third front government could lack a common agenda to revive the country’s struggling economy, pressuring both the rupee and India’s credit rating.
“The minimum they can do is to remove the uncertainty on the policy front so that having invested we don’t start regretting,” Debnarayan Bhattacharya, managing director of Hindalco Industries Ltd., said in a Feb. 14 interview, referring to the next government of Asia’s third-largest economy. Otherwise “people will think twice, thrice, four times before investing.” Hindalco is India’s second-largest aluminum maker.
Regional parties could secure as many as 215 seats in the 545-member parliament, with the BJP under prime ministerial candidate Narendra Modi emerging as the largest party with 202, a Times Now and C-Voter opinion poll predicted on Feb. 13. While that signals Modi may govern in a coalition, the lingering possibility of disparate regional parties taking power is evoking memories of past third front administrations that crumbled in two years after infighting.
“There is just too much ambiguity about the third front,” T. Srinivasa Rao, the chief financial officer at Rain Industries Ltd., which makes products including chemicals, said in a Feb. 11 interview in Hyderabad. “It may be too busy trying to survive to pay attention to the economy. Our country can’t afford to lose more years.”
Rao is among 14 Indian company executives surveyed by Bloomberg News this month, all of whom said a BJP-led government would be the best for reviving the $1.8 trillion economy.
Consumer-price inflation has averaged about 10 percent in the past year in India, even as annual economic growth holds near a decade low of 4.5 percent. Investment projects are stalled as the looming election and red tape snarl decision making.
Modi, chief minister of Gujarat, is projecting his image as a magnet for investment and record of stronger-than-average growth in the state he’s ruled since 2001. Opponents allege he’s an autocrat who failed to control deadly anti-Muslim rioting in Gujarat in 2002. He’s denied wrongdoing.
No respondent in the Bloomberg News survey chose Congress, whose campaign is led by its party Vice President Rahul Gandhi, or a third front. All said a BJP administration would be best for spurring stock and bond markets and the rupee.
The currency has tumbled about 13 percent against the dollar in the past year. The benchmark S&P BSE Sensex index of shares has risen 5 percent in the same period, while the yield on India’s 10-year government bonds has climbed almost 1 percentage point to 8.79 percent.
“We need a strong and stable government at the center,” said Rajiv Agarwal, chief executive officer at Essar Ports Ltd., without specifying which party would be best placed to achieve it. “That will be the biggest boost for the economy and markets.”
Congress, in power in a coalition for a decade, will get just 89 seats, it’s lowest tally on record, according to the C-Voter poll. The party has been beset by a deteriorating economy and graft allegations, which led to opposition protests in parliament that repeatedly disrupted the legislature and slowed the pace of policy changes.
Billionaire Kumar Mangalam Birla, in an interview in March 2013, said he would rather invest in countries including Brazil and Indonesia because “we haven’t seen such uncertainty and lack of transparency in policy anywhere.”
“There will be a big knee-jerk reaction” if a BJP-led coalition doesn’t come to power, U.R. Bhat, managing director of Dalton Capital Advisors India Pvt., a unit of U.K.-based Dalton Strategic Partnership LLP that has $2 billion of assets globally, said Feb. 13. “Modi is the best bet as far as the view among market participants is concerned.”
The 11 regional parties that formed a bloc this month hold 92 seats and said they are seeking greater coordination in the final session of parliament before the nationwide election.
They included the Communist Party of India (Marxist), the Communist Party of India, Janata Dal (United), Samajwadi Party, Biju Janata Dal and All India Anna Dravida Munnetra Kazhagam.
A joint program will be announced for campaigning together for the vote, Sitaram Yechury, a leader of the Communist Party of India (Marxist), told reporters in New Delhi on Feb. 5.
“Most members of this so-called third front government are parties that believe in populist measures, which is something that we can do without right now,” G. Jayaraman, executive president at Birla Corp., a cement maker based in Kolkata, said in a Feb. 11 interview. “Most of them are against economic liberalization. A third front government at this juncture would be a disaster.”
Samajwadi and All India Anna Dravida Munnetra Kazhagam have pursued populist policies such as loan waivers and doling out free laptops in the states where they govern.
Regional parties representing particular castes or geographical areas in the nation of 1.2 billion people ruled from 1989 to 1991 and 1996 to 1998.
While the last third front government cut taxes, took steps to increase trade and tried to attract foreign investment, it broke apart after just two years. The previous regional alliance also failed to see out its term.
The front’s efforts in 1997 to spur the economy had more to do with the effectiveness of its finance minister at the time, Palaniappan Chidambaram, said D.H. Pai Panandiker, president of the RPG Foundation, a New Delhi-based research group.
Chidambaram holds the same office in the ruling Congress-led coalition and has pared India’s budget deficit to a six-year low of 4.6 percent of gross domestic product, seeking to preserve its investment-grade rating. Standard & Poor’s warned in November that the rating may be cut to junk unless the election leads to a government capable of reviving growth.
The finance minister defended the ruling party’s economic record in his interim budget speech three days ago, saying India managed to keep its head “above the water” amid risks such as reduced monetary stimulus by the U.S. Federal Reserve.
“There is no one with Chidambaram’s vision among the current regional leaders,” Panandiker said in a Feb. 14 interview. “The problem with them is there are too many egos. The BJP and Congress will buy out the regional parties.”
The increasing importance of regional parties will hamper “the efficacy of nationwide policy making, regardless of the political complexion of the eventual central government,” Moody’s analyst Rahul Ghosh said in a statement on Feb. 11. The sudden popularity of the anti-graft Aam Aadmi Party has thrown another wildcard into the election outlook.
“A third front government would be inferior to the present situation,” Goutham Reddy, executive director at India’s Ramky Infrastructure Ltd., said in a Feb. 11 interview. “The new government should be more market friendly. The regional parties which make up the third front lack a national perspective and, at times, have no economic agenda to speak of.”
To contact the reporters on this story: Sharang Limaye in Hyderabad at firstname.lastname@example.org; Abhishek Shanker in Mumbai at email@example.com; Andrew MacAskill in New Delhi at firstname.lastname@example.org