India General Elections 2014: UPA 3?

Since the middle of 2011, the Congress party has suffered multiple setbacks throughout the country. However the  fragmented nature of Indian politics and the large number of regional parties can give the Congress party significant advantages in the coming general election.

The above map shows my assessment of what the General elections 2014 will throw up. 

The odds are heavily loaded against a non-congress government.  However there are three states which are key to the formation of a NDA or  non-congress government

1. Andhra Pradesh:  AP is the state which sent the maximum number of congress MPs to the center in the past 10 years. As of now, Congress is in disarray in Andhra Pradesh. There are three factors in  which are dominant in AP. The best case situation for the BJP is if TRS and TDP does well and Jagan eats into the voteshare of the congress
1. Jagan: Jagan with his massive financial resources and the grassroot organization is expected to be the dominant force in AP. He is expected to do well and may get about 15 MPs. 
2. Telangana: Telangana will be a major issue. With the huge protests in the region and the support for the cause TRS and BJP can win close to 7 seats. Congress will be wiped out in Telangana.
3. TDP:Since there is no PRP to split the votes, TDP may do well in some pockets and can garner around 10 MPs.                                             
2. Rajasthan: Anti-incumbency is the norm in Rajasthan. The performance of Ashok Gehlot government is nothing to write home about. 2013 state elections in Rajasthan should make the situation much clearer. The weakness of BJP may hinder its ability to make a comeback in Rajasthan. However if a strong leader like Narendra Modi is projected, Rajasthan may just fall into BJP hands. Congress will certainly not be able to match its 2009 numbers and will be down atleast by 5 to 15 seats. Given the anti-incumbency tradition, BJP is at a slight advantage
3. Karnataka : The miserable performance of the BJP government in Karnataka will dent BJP's chances in Karnataka. But the weak opposition and the infighting in congress should enable BJP to get atleast 10 seats.

Other states like Maharastra, Jharkhand and Delhi can influence the resuts to some extent. Maharastra will be a 4 way split between BJP, Shiv Sena, NCP and the Congress with MNS winning in pockets. However in the final tally NCP & Congress will beat BJP & Shiv Sena. Delhi will witness a direct fight between BJP and Congress and if BJP can repeat the performance of the MCD polls they can sweep Delhi. Overall BJP can gain 5 seats and Congress can lose 5 seats

So in the overall scheme of things Congress will lose 50 seats. Out of the 50 seats which congress will lose BJP can gain 20 seats, its allies can gain 15 seats and neutral parties can gain 15 seats.

In Kerala and West Bengal, the left parties will make a comeback. Mamta and congress may lose 15 seats overall and left may gain 15 seats.

Congress may lose a few more seats in Gujrat and Madhya pradesh if there is a strong anti-congress sentiment in the country

So overall

UPA: 170 seats

Congress: 130 seats

Strong Congress Allies (NCP, SP, Muslim Parties): 40 seats

Inclining towards UPA: 65 seats

Left: 45 seats

BSP: 20 seats

Strictly Neutral: 96 seats

AIDMK: 30 seats

YSR: 15 seats

TDP: 10 seats

TRS: 5 seats

JMM: 3 seats

BJD: 18 seats

TMC: 15 seats 


Leaning BJP: 42 seats

JDU: 25 seats

SAD: 4 setas

AGP: 1 seat

INLD: 2 seats

SS: 10 seats

BJP: 130 seats

In the end it will be quite a close race. But UPA will have an edge. Unless BJP can sweep in some of the states it will be difficult to dislodge UPA from the centre.

Post Independence economic history: Money growth

Post Independence India has seen a steady growth of money supply averaging around 17% CAGR.
This has been primarily been driven by the loose monetary policies of RBI as seen by the close correlation between M3 and M0 which is the reserve money.

In the graph shown the growth rates of the reserve money(M0) and broad money(M3) have been plotted. 

As we can see both the growth rates show close correlation. There are some years in which growth rate of one exceeds that of the other. I will analyze the charts in the key time periods in Indian history

1. 1951-1970: This the Nehruvian era which had the big five year plans. Here the M3 growth on an average was a few basis points higher than the M0 growth. Newly independent India and the five year plans led to massive capital investments in almost every sector of the economy. Since India was under the Bretton Woods system where all currencies were pegged to the dollar and dollar to gold, increasing money growth led to higher inflation leading to first of the rupee devaluations.
2. 1970-1990: These are the two lost decades in recent Indian history. Economic stagnation started which was worsened with nationalization of banks and other industries. Public sector spending zoomed. Marginal income tax rates reached high 90s. This was socialism at its peak. The government deficits were increasingly being financed by the reserve bank leading to the high M0 growth. This was a period marked by high inflation, low growth and a dramatic increase in the number of poor. Incidentally it was the beginning of the "dynasty" and consequent deterioration of Indian institutions. 
3. 1990-2010: As the Bretton Woods system envisaged a fixed exchange rate, India with its high inflation was particularly susceptible to foriegn exchange crises. Triggered by the first gulf war and the fall of the Soviet Union, the biggest economic crisis to hit modern India took its toll. Under IMF diktat, India was to be liberalized. But some of the biggest reforms got implemented only from 1994-95 onwards. This led to the excess growth of M3 which was the result of financial liberalization and higher investment opportunities. However with the election of the UPA loose monetary policies were unleashed on to the Indian economy. The massive increase in reserve money took place alongside the great credit bubbles in USA and Europe. This unleashed a flood of cheap money which went into capital investment, housing and excess government spending. After the global financial crisis, the money growth has been slowly coming down in a period of excess liquidity causing high inflation.

Going forward, the RBI should embrace a tighter monetary policy and reduce the reserve money growth to under 10%. The GDP growth will reduce at first but will pickup later. Companies whose only advantage was access to capital will suffer and some of them will go bankrupt but those who remain will grow through producivity improvements. The government which is finding thousand reasons to spend will be constrained by the heavy interest burden prompting disinvestment and reforms. But the monetary history of India suggests that RBI is soft on inflation and it will probably continue to be so in the future. Expect a depreciating rupee and 9% inflation going forward.

An Overview of Financial Year 2011-12

As we are heading into a new financial year, it may be prudent to examine all the key events which took place in the previous year from a political and economic standpoint

Politics: We have seen a number of political developments in the last 12 months, some of them with great import for years to come. I have listed down some of them (from whatever I recall at the top of my mind)

1. Anna Hazare & Baba Ramdev's Anti corruption movement
2. Blowing out of 2G scam and other corruption scandals
3. Assembly elections in West Bengal, Kerala, Tamil Nadu, Punjab, Goa, Uttarakhand, UP and other smaller states

The last 12 months have witnessed enormous churn in the overall political context with corruption coming to the forefront in national discussion weakening the congress government immeasurably. The assembly elections served to reinforce the weakening of the congress government as it performed below expectations in every single election in the past 12 months. 

In the next 12 months, we should expect to see a central government besieged by various scams and attacks from a number of players leading to further weakening before the final blow is delivered in 2014

Economy: The last 12 months brought about the spectre of stagflation over India. The credit boom during 2004-08 had hidden some of the structural deficiencies of the Indian economy. The global financial crisis led many to believe that the India bubble would be burst but future monetary and fiscal stimulus only postponed the problem to 2012. Now there is almost no scope for fiscal or monetary stimulus. The full effect of stagflation will be borne with 6% growth and 9% inflation.

Some of the key observations on the Indian economy during FY 2011-12 are as follows

1. There has been decreasing corporate profitability in every sector of the Indian economy. The overall corporate profits for India Inc will be marginally higher than what was in 2010-11. 
2. The debt bubble has been burst with a number of corporates finding it extremely difficult to pay back loans and maintain solvency
3. Policy paralysis of the central government which had been hidden due to excessive lending and euphoria on emerging markets has been fully exposed
4. Socialist policies like Right to food and fuel subsidies are causing wasteful consumption leading to capital wastage on an enormous scale.
5. Many Indian companies are restructuring their operations and this period will probably determine the winners and losers of the decade

 Inspite of the overall bad news, there have been some bright spots in the Indian economy like the impressive growth of engineering exports and also the IT sector. If the present growth continues in both these sectors it will provide relief to the economy as a whole