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State Elections: 4-1 verdict for BJP underscores pro-incumbency trends

Big victory in Uttar Pradesh (UP) signals political stability

* BJP triumphed 4-1 in the recently concluded assembly elections in the five states, highlighting the pro-incumbency factor in the state where it was in power. BJP’s comfortable victory in UP (the largest state of India that also propelled BJP’s 2014 and 2019 General Election triumphs) with two-thirds majority and retention of power in Uttarakhand (two-thirds majority), Manipur (simple majority) and Goa (won 50% of seats) will mean continued political stability, policy and reform momentum as well as fading of any risks associated with political uncertainty in an already volatile and uncertain market context. In Punjab, the Aam Aadmi Party (AAP) swept to power with four-fifths majority and became the only regional political party in India that has now won power in two states.

* Key highlights from the State verdicts: a) an incumbent has been voted back to power in UP for the first time in 37 years. Mr. Yogi Adityanath becomes only the third chief minister to complete a five-year tenure and the first Chief Minister in UP to complete a five-year tenure and return to power. BJP+ alliance won 273/402 seats; b) in Uttarakhand, since its creation two decades ago, this is the first time an incumbent government has been voted back to power. BJP won 47/70 seats; c) AAP will become the first regional political party in India to govern two states after its victory with fourfifths majority in Punjab. AAP won 92/117 seats in Punjab; d) Goa defied the exit poll predictions of a hung assembly and gave a clear verdict. BJP won 20/40 seats in Goa.

* This round of election results re-emphasizes the recurring trend of decisive and clear mandates in the state elections that augurs well from state-level governance perspective without any pulls and pressures of coalition politics. Given the significance of UP in overall scheme of things and magnitude of BJP’s victory, these results will bolster the narrative of pro-incumbency as India heads into 2024 General Election. We recall that the massive victory of 2017 in UP paved the way for BJP to regain power in the subsequent General Election in 2019, albeit, with intermittent hiccups along the way (it lost state elections in 2018 in Chattisgarh/Rajasthan).

* Another important political implication from the state election results is further fragmentation of opposition space with Congress (the single-largest opposition party) unable to retain Punjab and cause upheaval in any other state. AAP’s resounding victory in Punjab thus has significance beyond the state politics and highlights its aspiration to become a preferred choice in the opposition spectrum for 2024 General Election. Several other Non-BJP CM’s (West Bengal, Telangana) have also been jostling for the same space. While General Election-2024 is two years away and way too early to hazard a guess on how the contest will evolve, AAP’s victory in Punjab makes the opposition space more competitive, in our view.

* As the results are by and large in-line with expectations and exit poll predictions, the equity markets will move on to more important aspects in the near term – the RussiaUkraine geopolitical conflict, the US Fed rate hikes, elevated crude oil prices and the RBI’s response to rising inflationary pressures in the economy. We published our take on the ongoing geopolitical conflict (Russia Ukraine Strategy note published on 10th March) along with our preferred ideas and also revised our estimates for several sectors. We expect markets to stay volatile until the existing headwinds subside. Valuations though at a P/E ~19x FY23E EPS for Nifty look relatively more reasonable.

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