Nomura - Asia Special Report - India's Defining Moment

Please see Appendix A-1 for
analyst certifications, important

disclosures and the status of
non-US analysts.

8 April 2014

Principal authors

Geopolitics
Alastair Newton - Nlplc
alastair.newton@nomura.com
+44 20 7102 3940

Asia Economics
Sonal Varma - NFASL
sonal.varma@nomura.com
+91 22 4037 4087

Aman Mohunta- NFASL
aman.mohunta@nomura.com
+91 22 4037 5595

India equity strategy
Prabhat Awasthi - NFASL
Prabhat.awasthi@nomura.com
+91 22 4037 4180

Asia FX strategy
Craig Chan - NSL
craig.chan@nomura.com
+65 6433 6106

Asia rates strategy
Vivek Rajpal - NSL
vivek.rajpal@nomura.com
+65 6433 6555

Indias defining moment
Politics: We see a 75% probability that the BJP-led National
Democratic Alliance will secure a solid enough plurality to pull
together a majority coalition, under the leadership of Narendra Modi.
Economics: We see this outcome as a medium-term positive for the
economy, as it should accelerate economic reforms and, coupled
with continued prudent monetary policy, set the stage for a steady
improvement in Indias macroeconomic fundamentals.
Equity strategy: We believe that an NDA win would lead to a further
positive knee-jerk reaction. A sustained rally in growth cyclicals will
be hard, but we expect rate cyclicals to benefit. We see 5-10%
upside to our December 2014 Sensex target of 24,700 in the case of
a strong election outcome.
FX strategy: Our baseline view would aid in maintaining recent
positive INR momentum given a pickup in positive sentiment
surrounding upcoming reforms and an investment boost. However,
should the NDA win fewer than 180 seats we would expect a notable
sell-off.
Rates strategy: We are neutral on bonds in the near term, but
believe fiscal consolidation after the election could sow the seeds for
a medium-term rally.

Global Markets Research
Asia Special Report
Nomura | Asia Special Report 8 April 2014

2
Contents

Executive summary 3
Introduction 5
Indian elections: The state of play 6
Box 1: Fifteen basic facts regarding the election 7
Possible election outcomes 13
Time for a change? 13
Third-party threats 13
Modis momentum 15
Four likely scenarios Nomuras view 16
And after the election? 17
Economic implications 19
What elections can and cannot change 19
Growth has bottomed 19
Growth momentum to strengthen from 2015 20
Macroeconomic imbalances to gradually correct 21
Past elections and their economic impact 21
A peek at the election manifestos 22
Box 2: 10 reforms to do in the first 100 days 22
Election scenarios and the economy: good, bad and ugly 23
Foreign and regional policy 27
Foreign policy: Deeper Indo-Japanese ties? 27
Regional policy: A potentially less dangerous neighbourhood? 27
Equity strategy: The now, the then and the in between 29
Short-term market reaction could be significant 29
Significant short-term volatility after election results 29
Fundamentals usually dominate in medium term 29
Turnaround will take time, even with a strong government 30
Portfolio construction depends on pre-election returns, election results and post-election
reaction 31
FX strategy: INR to ride on NDA-wave 36
India rates strategy: Glass half full 38
Annex A: Abbreviations 40
Annex B: The two main coalitions/parties 41
Recent Asia Special Reports 42


3
Executive summary
Indias general election has finally arrived. Expectations are high and markets are pricing
in a more centre-right Bharatiya Janata Party-led (BJP) government to come to power,
with Narendra Modi as prime minister. However, the outcome of elections has historically
been notoriously difficult to forecast. Against this backdrop, we present four possible
scenarios and their likely economic and equity, FX and rates market impact (Figure 1).
Good outcomes (75% likelihood)
Scenario A The NDA wins over 220 seats: 50% probability
Scenario B The NDA wins 200-219 seats: 25% probability
We see a 75% probability of the BJP-led National Democratic Alliance (NDA) winning over
200 seats giving it a solid plurality from which it should be able to negotiate a solid
coalition.
A Narendra Modi-led NDA government is a medium-term positive for the economy, as we
foresee accelerated execution of reforms in areas such as building infrastructure,
promoting urbanisation and consolidating fiscal finances. Enhancing the supply side of the
economy, coupled with continued prudent monetary policy, should set the stage for a
steady improvement in Indias macroeconomic fundamentals namely gradual disinflation
and smaller and more stable twin current account and fiscal deficits. Importantly, these
reforms will take time, but as they progress they should feed off each other and unleash
other positive indirect effects on the economy. For example, a moderation of inflation and
a rise in potential growth (to 6.5% from 6.0% now), should enable the RBI to hold the
course on rates in 2014-15, and thereafter, cut rates. Improving economic fundamentals
should also buoy investor confidence and could lead to an upgrade in India's sovereign
credit rating, helping to attract capital inflows and reflate asset prices. A new paradigm of
supply-enhancing reforms and prudent monetary policy should enable faster growth of
around 6.0% in 2015, from 5.0% in 2014 and 4.7% in 2013.
We expect forward-looking financial markets to react positively in this scenario. In the
equity market, we expect oil sector, financial sector and asset-heavy companies to benefit
from post-election reforms. We remain sceptical on the rally in capital goods, but we
continue to like IT. USD/INR would likely sustain recent positive INR momentum. In
particular, a victory of 220 seats or more would see spot USD/INR quickly trade towards
the 58-figure level (spot reference: 60.09) and appreciate to 57.5 by end-2015. For rates,
we are neutral in the near-term, but there could be a medium term rally in 5-year bonds (to
below 8.60%; spot reference: 9.07%) on increased risk appetite of domestic investors and
signs of fiscal consolidation.
Bad outcome: Scenario C The NDA wins 180-199 seats (15% likelihood)
We see this scenario as bad-to-neutral for the economy and markets as the NDA would
have to scout for more coalition partners, meaning less room for policy manoeuvrability
and Mr Modi may not be prime minister. We expect executive decisions to continue, but
legislative reforms would be more difficult. While better global growth will still drive a
business cycle recovery (we expect growth at 5.5% in 2015 from 4.8% in 2014), we expect
potential growth to remain unchanged (at 6.0%) due to a slow burner of structural reforms.
Continued supply-side bottlenecks would necessitate another 50bp hike in the repo rate to
tame inflation.
Markets would be disappointed in this scenario. In the equity space, this scenario would be
positive for IT services, pharmaceuticals and banks (after the correction) and negative for
consumer and capital good stocks. Given long INR positioning, we expect USD/INR back
to around 61.5 in the near term (spot reference: 60.09). In rates, we expect the 5yr bond
yield to remain high at 8.80-9.20%.
Ugly outcome: Scenario D The NDA wins fewer than 180 seats (10% likelihood)
In the case of a third front government, political instability and lack of a coherent
economic agenda would derail reforms, exacerbating already weak fundamentals and
resulting in large capital outflows and a likely sovereign credit rating downgrade. We would
expect real GDP growth to remain around 5.0% in 2014-2015. With a further decline in
potential growth (to 5.5% on our estimates), fiscal and inflation concerns would rise,
increasing the burden on the RBI to tackle inflation, leading to 100bp worth of additional
monetary policy tightening.
We would expect a significant sell-off in the equity markets, reversing the recent rally, with
IT services, pharmaceuticals and consumer stocks faring better and domestic cyclicals

4
underperforming. This scenario could see a quick sell-off in INR towards 63 with the
depreciation trend continuing to 66 by end-2015. In rates, the 5yr yield would move closer
to the upper end of a 9.25-9.50% range.
Bottom line: The credibility of the central bank has already imparted a good degree of
macro stability to Indias outlook; a stable political outcome and reform-minded
government is an important missing piece of the puzzle. We see a 75% probability of a
stable government led by the NDA, which should result in more economic reforms, stable
policies and a gradual improvement in Indias medium-term economic outlook.

Fig. 1: Election scenarios: Economic and market outlook

Source: Nomura Global Economics.

BAD UGLY
Scenario A Scenario B Scenario C Scenario D
Poltical outcome
NDA wins over 220
seats
NDA wins 200-219 seats NDA wins 180-199 seats
NDA wins fewer than
180 seats
Probability (Nomura) 50% 25% 15% 10%
Who forms the
government?
NDA forms the
government with a
strong BJP plurality and
few collation partners;
Modi as the PM
NDA forms the
government with a few
more coalition partners;
Modi as PM
NDA forms the government
but without Modi
A coalition of regional
parties with the
outside support of
INC
Economic outlook
Near term: Positive
Medium term: Positive,
GDP to rise to 6.0% in
2015 (5% in 2014);
imbalances to correct;
rates on hold in 2014-15
Near term: Neutral
Medium term: Positive
(similar to A)
Near term: Neutral
Medium term: Neutral
GDP to rise to 5.5% in
2015 (4.8% in 2014); 50bp
repo rate hike
Near and medium
term: Negative
GDP to remain
around 5% in 2014-
15; 100bp repo rate
hike
Reform outlook
Positive
Faster execution, fiscal
consolidation, focus on
infrastructure,
urbanisation and agri
Mildly positive
Neutral
Executive decisions to
continue; legislative
reforms tougher
Negative
Populism; lack of
coherent policy
framework
Equities
Immediate: Positive
for financials, asset
owners in infrastructure,
oil & gas, IT svcs after
correction. Negative for
consumer
Immediate: Positive
for financials, asset
owners in infrastructure,
oil & gas, IT svcs after
consumer
Immediate: Negative
Positive for IT svcs,
pharma, banks after
consumer, cap goods
Immediate: Negative
Medium term:
Negative
Positive for IT svcs,
pharma, consumer.
Negative for all
domestic cyclicals
FX ( USD/INR spot
reference: 60.09)
Near term: Spot
USD/INR to test 58-
figure
Near term: Spot
USD/INR around 59.5
Near term: Spot USD/INR
back to 61.5
Near term: Spot
USD/INR to trade
towards 63
Medium term:
Negative
Rates (5yr bond yield
spot reference: 9.07%)
Near term: Neutral
5yr bond yield to move
lower than 8.60%
Near term: Neutral
5yr bond yield to move
gradually lower to 8.60%
Near term: Neutral
5yr bond yield to stay
higher (8.80%-9.20%)
Near term: Negative
Medium term:
Negative
5yr bond yield to rise
to 9.25%-9.50%
GOOD

5
Introduction
It is something of a clich to describe an upcoming election as the countrys most
important in many years, but this may well apply to Indias general election this year at
least from the perspective of financial markets.
The Indian economy has been in a downward spiral since 2011 because of imprudent
fiscal policy and a lack of supply-side reforms, fuelling high inflation and large fiscal and
trade deficits. Animal spirits are low and the economy has been stuck in a stagflation-type
situation. Space for monetary or fiscal policy to boost growth is limited as supply-side
bottlenecks are hampering the economys ability to grow more quickly without worsening
the macro-imbalances.
Hence, the forthcoming elections are important. A stable government focused on
economic reforms could reinvigorate animal spirits, ease business uncertainty and address
the supply bottlenecks. This could swing investor sentiment significantly in favour of India
in the next few years, as prospects of higher productivity and a revival of the investment
cycle boost potential growth and easing supply-side constraints make room for rate cuts,
which may further boost investments.
The recent run-up in equity markets and the outperformance of INR/USD suggest that
markets are pricing in some probability of a good outcome. This may be supported by the
hope that opinion polls are correct in pointing to a victory for the centre-right Bharatiya
Janata Party (BJP), widely perceived as more business-friendly and especially with the
current chief minister of Gujarat, Narendra Modi, nominated as the partys prime ministerial
candidate.
However, if the election results in a hotchpotch coalition government or a third front, then it
would diminish prospects of structural reforms to revive potential growth and could risk
significant capital outflows. Monetary policy would probably have to be tightened even
further. Hence, we see the forthcoming elections as a make-or-break event for Indias
medium-term prospects.
In this report, we first lay out the background to the Indian elections, including key political
parties and their allies, the election timeline, recent electoral trends and the decisive
states. Then, we present Nomura's view on the likely election scenarios and their
probabilities. Finally, under these scenarios we highlight the likely impact on the economy,
and our equity, FX and rates recommendations. Our bias is for a positive outcome, but we
trust this framework will also benefit readers who may wish to assign a different probability
to these scenarios.


6
Indian elections: The state of play
India is a multi-party parliamentarian federal democracy and the forthcoming elections are
for the Lok Sabha, the lower house of parliament. The country is divided into 543
constituencies, each represented by a member of parliament. The party/coalition with a
simple majority (272 seats) forms the government (see Box 1 for 15 basic election facts).
Election timeline
The elections are scheduled to be held in nine phases between 7 April and 12 May. Exit
polls will start on 12 May (17:00 IST), with the final results announced on 16 May (Figure
2). The term of the current Lok Sabha comes to an end on 31 May 2014, which gives the
parties around two weeks to negotiate post-election alliances (if necessary) to form the
new government.

Fig. 2: Election timeline

Source: Election Commission of India and Nomura Global Economics.

Key political parties and their seat share
At present, the two main coalitions are the United Progressive Alliance (UPA) led by the
Indian National Congress (INC) also the ruling party and the National Democratic
Alliance (NDA) led by the Bharatiya Janata Party (BJP). There are several other regional
parties who fight elections on a standalone basis or just before the elections form a
coalition of regional parties under the banner of a third front. This time 11 regional parties
have come together to form a third front.
The INC-led UPA government (centre-left) has been in power since 2004. The UPA
government has focused on inclusive growth and has boosted rural terms of trade, but
corruption and rising inflation appear to be giving way to a wave of anti-incumbency. The
main opposition, the BJP-led NDA was in power from 1999 to 2004 (Figure 3; see Annex A
for political acronyms). See Figure 4 for the key leaders of BJP and INC.

April 7: First
phase of voting
May 12: Last
phase of voting;
Exit polls to
start
May 16:
Counting; result
announcement
May 17- May 31:
Negotiation
between coalition
partners
By June 1: New
government has to
assume office
End-June: New
government to
present the
budget
April 7:
First phase
(6 seats)
April 9:
Second
phase (7)
April 10:
Third
phase (91)
April
12:
Fourth
phase
(7)
April 17:
Fif th
phase
(121)
April 24:
Sixth
phase
(117)
April 30:
Seventh
phase
(89)
May 7:
Eighth
phase
(64)
May 12:
Ninth
phase
(41)

Asia Economics
Sonal Varma - NFASL
+91 22 4037 4087
Aman Mohunta- NFASL
+91 22 4037 5595

Geopolitics
Alastair Newton - NIplc
+44 20 7102 3940

7

Fig. 3: Seats held in the Lok Sabha (key parties)

Source: Election Commission of India and Nomura Global Economics. Note: Orange represents NDA; green represents
UPA and yellow represents outside support.
1:
These parties provided external support during respective tenures. *Fought
elections with NDA, but later switched to UPA.
Box 1: Fifteen basic facts regarding the election
1) Indias general election will be held between 7 April and 12 May in nine phases.
2) At stake are 543 seats in the lower house of parliament, the Lok Sabha; so, 272 seats are required for a majority.
1

3) 930,000 polling stations will be operating across the 543 parliamentary constituencies in 35 states and territories.
4) Around 814 million people are eligible to vote, of which at least 120 million are thought to have crossed the minimum
voting age of 18 since the previous general election in 2009.
5) Voting is on the basis of a first-past-the-post system in single-seat constituencies.
6) 84 seats are reserved for the scheduled castes and 47 for the scheduled tribes.
7) 28 major political parties and dozens of minor ones will contest the election.
8) No single party has won an outright majority since the 1984 general election.
9) For the past 15 years, Indias two main parties, the Bharatiya Janata Party (BJP) and the Indian National Congress
(INC), have between them fallen short of 50% of the total vote.
10) Both the BJP and the INC will lead a coalition into the election, respectively the National Democratic Alliance (NDA)
and the United Progressive Alliance (UPA).
11) Recent elections have also featured third front coalitions; to date, 11 regional parties have come together to form a
third front to fight the 2014 election.
12) An INC-led UPA government (centre-left) has been in power since 2004.
13) The centre-right BJP-led NDA currently leads in most opinion polls.
14) The final results will be announced on 16 May.
15) The current five-year parliamentary term officially ends on 31 May, allowing two weeks or so for post-election coalition
negotiations.

1
Additionally, the president can nominate two members from the Anglo-Indian community to the Lok Sabha.
Party/Alliance 1999-04 2004-09 2009-14
BJP 182 138 116
JD (U) 21 8 20
Shiv Sena 15 12 11
SAD 2 8 4
MDMK 4 4 1
PMK 5 6 0
AIADMK 10 0 9
BJD 10 11 14
TDP
1
29 5 6
INLD 5 0 0
RLD* 2 3 5
JMM 0 5 2
J&K NC 4 2 3
BSP
1
14 19 21
SP
1
26 36 23
CPI
1
4 10 4
CPI(M)
1
33 43 16
AITMC 8 2 19
DMK 12 16 18
RJD 7 24 4
LJP 4 0
TRS 5 2
NCP 8 9 9
INC 114 145 206
National Democratic Alliance (NDA) 299
United Progressive Alliance (UPA) 213 259
Winning Alliance

8
Fig. 4: Key leaders of BJP and INC

Source: News articles, Nomura Global Economics.

Fragmentation of Indian politics
Indian politics is becoming increasingly fragmented. In the 2009 elections, as many as 363
political parties participated in the general elections. Of these, only seven were national
parties (BJP, BSP, CPI, CPM, INC, NCP, RJD), 34 were state parties and a staggering
322 were registered but unrecognised parties (Figure 5). The number of non-national
parties is set to increase further in the 2014 elections.

Fig. 5: Number of national, state and registered (unrecognised) parties since 1952

Source: Press Information Bureau.

This trend towards fragmentation has made coalition governments a reality. For the past
15 years, the share of INC and BJP the two main parties has fallen to less than 50% of
total votes, while the share of the other regional parties has risen (Figure 6). The
fragmentation of Indian politics has occurred due to local, rather than national, issues
taking centre stage. This has given rise to politics based on caste, religion, minority groups
and communalism, among others.

Narendra Modi (63) Rahul Gandhi (43)
Party BJP INC
Current role Chief Minister of Gujarat since 2001 Vice President of the INC
Past political experience National Secretary, BJP
Chairperson, Indian Youth Congress
Chairperson, National Students' Union of
India
Education Masters in Politcal Science M.Phil in Developmental Studies
Economic ideology Centre right Centre left

9
Fig. 6: Share of regional parties on the rise

Source: Election Commission of India and Nomura Global Economics.

Key states and possible alliances
Fragmentation, therefore, has increased the bargaining power of states that are important
not only for pre-poll seat-sharing arrangements with the national parties, but also for post-
poll coalition negotiations (see next section for more)
2
. Figure 7 shows the map of India
with key states and the seats they account for (in brackets). The five decisive states are:
Uttar Pradesh, 80 Lok Sabha seats. Apart from the BJP and INC, the regional
parties of the BSP led by Mayawati and the SP led by Mulayam Singh Yadav
have a stronghold in the state.
Maharashtra, 48 Lok Sabha seats. The INC (in alliance with the NCP) and the
BJP (in alliance with Shiv Sena) are pitted against each other. The AAP has also
fielded candidates in the state and could pose a threat.
West Bengal, 42 Lok Sabha seats. It will see a battle mainly between the INC,
AITMC led by Mamata Banerjee and the parties on the Left.
Bihar, 40 Lok Sabha seats and has a number of different castes. The election will
primarily be fought between JD (U), the BJP (in alliance with LJP) and the INC (in
alliance with RJD).
Tamil Nadu, 39 Lok Sabha seats. The two regional parties DMK led by M
Karunanidhi and the AIADMK led by Jayalalitha have a stronghold and neither
have entered pre-poll alliances with national parties. The BJP, though, has
announced a pre-poll alliance with DMDK, PMK and MDMK.

2
General elections 2014: Key states to watch, 24 March 2014, New York Times blog.
40
45
50
55
60
1991 1996 1998 1999 2004 2009
National parties Regional parties
% of total valid

10
Fig. 7: Number of seats available in each state

Note: * Andhra Pradesh has been bifurcated into Telangana and residuary Andhra Pradesh effective 2 June 2014. Source: Election Commission of India and Nomura Global
Economics.

Ideology
The political parties represent a wide range of ideologies. Of the two main parties, the BJP
is seen as centre-right and the INC as centre-left. However, these ideological
demarcations have to be taken with a pinch of salt for instance, even the centre-right
BJP opposed foreign direct investment in the multi-brand retail sector due to concerns
over its adverse effect on domestic manufacturing. Indeed, it is possible to argue that other
than those on the Left, many political parties have no real solid ideological basis.
Nevertheless, in Figure 8 we place the key parties along the ideological spectrum, as we
see it.


11
Fig. 8: Political ideologies


What the opinion polls say
Any consideration of opinion polling should, we believe, come with a caveat about the
difficulties of scientifically sampling an electorate of over 800 million in a country as diverse
as India. For example, in 2004 the polls seemed to point firmly to a ruling BJP victory, only
for the main opposition Indian National Congress to snatch a surprise plurality by a non-
negligible 37-seat margin. We believe that this gap between opinion polls and the actual
election outcome may, in part at least, have been a consequence of some tendency
towards an urban bias in opinion poll sampling, which may in turn lead to something of a
bias towards the BJP, and which may persist today.
That said, as Figure 9 makes clear, there is something of a reassuring consistency about
recent opinion polls pointing not only to a BJP plurality but also to heavy losses for the INC
from the 206 seats it won in 2009 to, perhaps, as few as half this number or even less.
Other parties are projected to win more than 200 seats, so the fragmentation of politics
looks set to continue. Among the regional parties, the performance of the Aam Aadmi
Party (AAP), which is fighting nationally on an anti-corruption ticket for the first time, and
that of the third front made up of the 11 regional parties will be closely watched to assess
how much support they may draw away from the two main coalitions.
A survey carried out by Pew Research Center and published on 26 February caught our
particular attention.
3
The key findings of the survey, as we read them, were as follows:
Seven out of 10 Indians are dissatisfied with the way things are going in India
today, a finding which Pew notes is remarkably widespread among both BJP
and Congress backers; among young and old; and among city dwellers and rural
residents.
By a margin of more than three-to-one, voters stated a preference for a BJP-led
government after the upcoming election rather than an INC-led one.
By a margin of more than two-to-one, voters said that the BJP would do a better
job on each of half-a-dozen challenges facing India, including fighting corruption.
78% of voters viewed Mr Modi favourably compared to 50% for the INCs putative
prime ministerial candidate, Rahul Gandhi.

3
The full results of the survey can be found at http://www.pewglobal.org/2014/02/26/indians-want-political-
change/pew-research-center-india-political-report-final-february-26-2014/.

12
Fig. 9: Recent opinion poll surveys

Note: * includes TDP. Source: India Today, Times of India, Economic Times, CNN-IBN, NDTV and Nomura Global
Economics

Poll Conducting agency Period BJP-led NDA INC-led UPA Others
Times Now - CVoter Oct-13 186 117 240
Times Now - CVoter Dec 13 -Jan 14 212 103 228
CNN IBN - CSDS Jan-14 227 125 191
India Today Jan-14 212 103 228
ABP News - Nielsen Jan-14 226 101 216
Times Now - CVoter Jan-Feb 14 227 101 215
CNN IBN - CSDS Jan-Feb 14 222 129 192
India Today - CVoter Feb-14 226 103 214
ABP News - Nielsen Feb-14 236 92 215
NDTV-Hansa Feb-14 229 126 188
CNN IBN - CSDS Mar-14 240 116 187
NDTV-Hansa* Mar-14 259 123 161

13
Possible election outcomes
Time for a change?
After 10 years of INC rule there seems to be a real wind of change blowing consistent
with one of a number of long-term tendencies we see in Indian politics, i.e. a penchant for
anti-incumbency. We believe we also saw this tendency, to an extent at least, in the state
assembly elections held in Q4 2013, and which have been taken by some commentators
to be a solid indicator for the general election. However, as we wrote at the time:
The incumbent Congress has lost both Delhi and Rajasthan, while the BJP has
retained a majority despite being an incumbent government in Madhya Pradesh
and Chattisgarh. This indicates a rising wave in favour of the BJP as well as an
anti-Congress vote in these states.
We have previously noted that we consider Delhi, traditionally a Congress
stronghold, the most important of the recent state elections in terms of possible
indications for the general election. Therefore, BJP's victory there should not be
dismissed, in our view, even though it, together with the solid showing of AAP,
can to an extent be attributed to the longstanding tendency of Indian voters to opt
for anti-incumbency. If anti-incumbency proves to be a core theme in the 2014
general election, it will clearly be to Congress's disadvantage overall although it
does not follow, of course, that BJP would necessarily be the main beneficiary.
In sum, we believe wins in Delhi and Rajasthan will be interpreted as a boost for
BJP's prospects by financial markets and are likely to give the party additional
momentum as general election campaigning starts to ramp up.
However, we would also caution that state election outcomes are not always a
reliable indicator of general election prospects, even with less than six months to
go before the latter is due to be held. In 1998, Congress performed exceedingly
well in the state elections, but the BJP came to power at the centre the following
year. In 2003, the BJP had performed well in the state elections, but it lost the
national elections held a few months later. This could be because voters
differentiate between state and central elections and local factors play a more
important role in the former. It is also important to note that the states of Madhya
Pradesh, Chhattisgarh and Rajasthan have been traditional strongholds of the
BJP, while it does not have much of a presence in the eastern and southern parts
of the country.
4

Third-party threats
This brings us to what we see as another long-term tendency in Indian elections, i.e., a
growing propensity for voters to abandon the two main parties in favour of smaller caste-,
ethnic- and regionally based parties. Although no third front coalition of such parties has
yet come close to performing well enough to form a majority government, smaller parties
have collectively, consistently secured over 50% of the total vote in recent general
elections (Figure 6). In both 1989-1991 (the National Front) and 1996-1998 (the United
Front), India was governed by weak coalitions to which neither the BJP nor the INC was
formally a party.
5

Two important points follow:
Although we cannot categorically rule out the possibility, it would be a major surprise
running contrary to the long-term trend if the BJP or even its NDA coalition (Annex
B) were to secure an outright majority
6

Anti-incumbency voting may yet benefit smaller parties to the point where the BJP
could struggle or even fail to form a majority government.

4
See India state elections: BJP wins, 9 December 2013.
5
We see the aftermath of the 1996 general election as arguably the more pertinent. This was the first time that the
BJP secured a plurality in a general election of 161 seats. However, it failed to pull together sufficient support to
win a vote of confidence in the Lok Sabha, the consequence of which was the formation of a third front government
under the banner of the United Front, which was supported from outside the formal coalition by the INC inter alia.
6
The BJPs best ever election outcome was in October 1999 when it won 183 seats and its NDA coalition secured
an outright majority of 303 seats.

+44 20 7102 3940


14
Notwithstanding the recent flurry of publicity around the AAP (or Common Man party)
see below the main threat to a solid BJP plurality may come from regional parties which,
together with the communists, have collectively garnered half the total votes in the past
eight general elections. As The Economist recently put it, Many expect Congress to slump
to a historic low, with less than 20% of the vote. If that happens, the BJP would gain most,
but regional figures would profit too.
7

The third-front governments of 1989-91 and 1996-98 were both based on regional parties.
So, we shall pay careful attention in the run-up to the general election to support for the
2014 manifestation of the third front, which was formally launched on 25 February and
which is made up of 11 predominantly regional parties, which currently hold 92 Lok Sabha
seats.
8
At its launch, the leader of one of its member parties, Prakash Karat of the
Communist Party of India (Marxist), noted that the coalition had been formed specifically to
oppose the BJP which it sees as too pro-business and, in its support for Hindus, divisive.
All this being said, we agree with The Economist that stable majority coalition building
among regional parties is almost impossible, not least because of often bitter regional
rivalries. Furthermore, opinion polls currently suggest that some member parties of the
third front stand to see the number of seats they hold fall, which does not bode well for the
prospects of the coalition as a whole.
If there is one particularly notable exception to this among the party members of the third
front, it appears to us to be the All India Anna Dravida Munnetra Kazhagam (AIADMK).
Based in Tamil Nadu and Puducherry, and currently in power in the former, opinion polls
suggest the AIADMK could triple its current nine seats in the Lok Sabha, which could see
its leader, Tamil Nadus Chief Minister Jayaram Jayalalitha, emerge as a potential post-
election kingmaker. We recall that the AIADMK joined the short-lived BJP-led government
after the 1998 election and its withdrawal of support was responsible for its collapse in
May 1999.
At least two parties not in the current third front could also stand to have a pivotal post-
election role:
The All India Trinamool Congress (AITMC): Often referred to simply as the
Trinamool Congress, the AITMC, which has a firm grip on power in the pivotal
state of West Bengal, is currently the sixth-largest in the Lok Sabha with 19 seats
and was part of the ruling coalition until it withdrew in September 2012 in protest
over a range of proposed economic reforms. The extent to which its leader,
Mamata Banerjee, may benefit from the support of high-profile anti-corruption
campaigner Anna Hazare remains to be seen, but we expect the AITMC to
perform at least as strongly as it did in 2009.
The Bahujan Samaj Party (BSP): Based primarily in the key state of Uttar
Pradesh and enjoying solid Dalit support there, the BSP won 21 seats in the 2009
general election, making it the fourth-largest party.
9
Dalits are estimated to
comprise over 16% of the population, so they represent a key element of the
voter base.
10
We therefore expect a similar showing from the BSP in 2014 as in
2009.
11

Then there is the insurgent Aam Aadmi Party (AAP). Born out of the anti-corruption
protests that have been a feature of much of the 2009-14 parliamentary term, just 12
months after its formal establishment, the AAP defied opinion polls (and the pre-election
forecast of many pundits) by coming second (28 seats out of 70) in the December 2013
Delhi state elections, just behind the BJP (31 seats). When the BJP declined to form a
state government, the AAP took up the challenge but lasted less than two months before

7
The other half,The Economist, 15 March 2014.
8
The 2014 Third Front currently comprises the All India Anna Dravida Munnetra Kazhagam, the All India Forward
Block, the Asom Gana Parishad, the Biju Janata Dal, the Communist Party of India, the Communist Party of India
(Marxist), the Janata Dal (Secular), the Janata Dal (United), the Jharkhand Vikas Morcha, the Revolutionary Socialist
Party and the Samajwadi Party.
9
The BSP was a member of the Third Front coalition which fought the 2009 general election, which caused a good
deal of pre-election interest in the possibility that its populist leader, Mayawati who has served four terms as chief
minister of Uttar Pradesh (most recently from 2007 to 2012) could have become prime minister.
10
The term Dalit is broadly interchangeable with Indias constitutionally protected Scheduled Castes and is
generally used for the mixed group of people who were traditionally regarded as untouchable.
11
The third- and fifth-largest parties after the 2009 general election were, respectively, the Samajwadi Party (23
seats) and the Janata Dal (United) (20 seats), which are both members of the 2014 Third Front. We expect both to
struggle to match their 2009 performance.

15
Arvind Kejriwal, the partys leader, resigned as chief minister over the refusal (on
constitutional grounds) of both the BJP and the INC to back his proposed appointment of
an anti-corruption ombudsman. Although the AAP came in for substantial criticism,
including from some of its own supporters, over the manner in which it governed, as well
as Kejriwals resignation, the party remains popular in Delhi and other cities.
12

Acknowledging the difficulty which any party (Congress aside) faces in turning itself into a
truly national electoral force, we nevertheless believe that it would be unwise, in light of the
Delhi state election, to write off the AAPs prospects of securing a significant number of
seats in the general election. We expect the party to focus its wider efforts in the states of
Haryana, Punjab and Uttar Pradesh in particular (all near its Delhi stronghold), as well as
the cities of Bangalore, Mumbai and Pune.
13
We also agree with the Financial Times
assessment that the AAP is seen to have the strongest potential in states that are
otherwise two-party contests, where both established parties have been tarnished from
previous stints in power; and that the party is generating strong interest among Muslim
voters, who are fed up with Congress, but unwilling to vote for Mr Modi.
14
Furthermore, Mr
Kejriwal has demonstrated what we see as an impressive ability to attract publicity both for
his party and himself, and to take advantage of social media, which may resonate strongly
in particular with the tens of millions of first-time voters.
15

Modis momentum
Our reservations about opinion polls and broader caveats notwithstanding, we
nevertheless readily acknowledge that the BJP will go into the general election with what
we see as one of the most important electoral assets momentum
16
. Irrespective of the
extent to which the outcome of the 2013 regional elections was a result of anti-incumbency
voting, the BJP capitalised strongly and has since been able to give the firm impression
that the general election is, for all intents and purposes, its to win.
For all this, we see little if any sign of the sort of BJP complacency that may have helped
Congress snatch victory from the apparent jaws of defeat in 2004; indeed, quite the
contrary as Mr Modi leads what we see as a high-intensity and innovative campaign.
Central to this, in our view, is something of a fundamental change in electoral strategy.
Whereas general elections since independence have tended to revolve primarily around
parties, we believe that Mr Modi has to a significant extent based his campaign on
personalities, effectively (and with all due respect to other party leaders) pitting himself
against the INCs vice-president and election leader, Rahul Gandhi, in a quasi-presidential
manner.
17
Although Mr Gandhi (together with now outgoing Prime Minister Manmohan
Singh) played a major role in the INCs impressive 2009 election victory, we expect that
this approach will favour Mr Modi.
We also note the increased use of social media in this campaign, aimed especially at
younger voters. As mentioned, the AAP has proven itself adept in this field, but as Anant
Goenka, the head of new media at the Indian Express group, has said, The BJP is by far
ahead of the rest, there is no comparison especially with the Congress its a huge part of
the campaign.
18

12
See, eg, Anti-corruption chief minister of Delhi Arvind Kejriwal resigns, Victor Mallet, Financial Times, 14
February 2014.
13
See, e.g., Indias Common Man party seeks to bounce back after Delhi blow, Amy Kazmin, Financial Times, 16
February 2014.
14
Indias Common Man party oozes charisma on its poll mission, Amy Kazmin, Financial Times, 19 March 2014.
15
See, e.g., Leader of Indias common men takes on media; but will it pay dividends?, Amy Kazmin, Financial
Times, 19 March 2014.
16
Further consolidating momentum behind Mr Modi, on the eve of the start of polling Chandrababu Naidu's Telugu
Desam Party (TDP) rejoined the NDA (of which it was a member in the 2004 election campaign). An NDTV opinion
poll forecasts a potential gain of 10 seats over and above the four it currently holds for the TDP and, therefore, the
NDA in Seemandhra (i.e., the residuary state when Telangana splits off from Andhra Pradesh on 2 June).
17
Although Mr Gandhi was named to lead the INCs election campaign, the party stopped short of naming him as its
candidate for prime minister consistent, according to its spokesman, with the partys tradition. There is no
constitutional obligation to name a prime ministerial candidate before the election, but some observers believe that
on this occasion the INC was keen to try to avoid pitting Mr Gandhi against Mr Modi in what would be seen as a
presidential-style campaign see, e.g., Indias Rahul Gandhi to lead Congress poll campaign, BBC News website,
16 January 2014.
18
See India elections: the unknown campaigners, Avantika Chilkoti, Financial Times, 21 March 2014; India
election: four more intriguing uses of social media, James Crabtree, Financial Times, 18 March 2014; and Tea
parties add twist to Indian digital election, Avantika Chilkoti, Financial Times, 26 February 2014.

16
Furthermore, we note that Mr Modi appears to be trying to turn the BJP into a truly national
electoral force i.e., wider than its historical voter base, primarily in the north and west of
the country actively campaigning even in small states with few Lok Sabha seats where
his party has enjoyed little if any success in the past.
Finally, although it likely came as no surprise to those following the BJPs evolving
campaign, we believe Mr Modis decision to contest the seat of Varanasi the Hindu holy
city on the banks of the Ganges in Uttar Pradesh is a potential boost.
19
As an op-ed on
the Hindustan Times live mint website noted:
It is widely expected that Modis nomination from Varanasi will positively affect
the outcome for the BJP in a number of other seats in Eastern Uttar Pradesh and
Bihar which are electorally important as together the two states send 120
lawmakers to the Lok Sabha. Further, the choice of Varanasi is also symbolic in
nature which indicates that the party may not have completely abandoned the
Hindutva ideology.
20

The seat will be strongly contested and, therefore, followed with particular interest but
efforts by other parties to field a single secular candidate against Mr Modi appear to have
failed, with not only the INC but a handful of other parties (including the AAP in the form of
its leader, Mr Kejriwal) lining up to battle against him directly
21
.
Four likely scenarios Nomuras view
Against this backdrop, we list below what we judge to be the likely outcome scenarios and
our probability of their materialising. A stable government, irrespective of whether it is led
by the BJP or the INC, is important for the economy we see a significant probability
(75%) of an NDA government winning a plurality of seats in the election, although we do
not know how decisive the victory will be.
Good outcomes
Scenario A The NDA wins over 220 seats: 50% probability
Our core scenario gives the BJP/NDA a solid plurality from which it should have
little difficulty negotiating a viable coalition. In this event, we believe that the
BJPs prime ministerial candidate, Narendra Modi, would be able to appoint a
cabinet largely consistent with pursuing reforms, cutting red tape and boosting
infrastructure investment. We would expect most of the hard yards to have to be
won in the early months, after which pro-reform zeal will likely fade and/or run into
increasing headwinds. This scenario would see the INC securing fewer than 100
seats.
Scenario B The NDA wins 200-219 seats: 25% probability
Relative to the 2009 election, an outcome in the 200-219 seat range would still be
a significant improvement for the NDA and should offer a solid enough basis to
build a majority wider coalition. However, more parties would have to be involved,
meaning more trade-offs over both key cabinet seats and policy. So, although we
still see scope for an early pro-reform push, we would expect the incoming
governments successes to be more modest.
Bad outcome
Scenario C The NDA wins 180-199 seats: 15% probability
The NDA takes 180-199 seats, but is still able to form a plurality. Nevertheless,
especially at the lower end of the range, both the BJP and markets would find this
a disappointing outcome. We think that a BJP-led majority government would
probably still emerge; but putting it together would likely prove challenging and
could threaten Mr Modis personal prospects for the prime ministers office. We
would question the ability of such an administration to pursue an aggressive
reform agenda.

19
Varanasi was won in 2009 by the BJP candidate Murli Manohar Joshi by over 17,000 votes, with the BSP
candidate second. Mr Modi is also contesting Vadodara in his home state of Gujarat.
20
The symbolism of Varanasi in 2014 elections, Rajesh Kumar, live mint, 20 March 2014.
21
Mr Gandhi will be challenged in the Amethi constituency of Uttar Pradesh (where he won over 70% of the vote in
2009) by the popular and high-profile former soap star Smriti Irani, on behalf of the BJP. Although Mr Gandhi is
thought likely to retain his seat, Ms Irani's presence on the ballot paper guarantees a high-profile contest.

17
Ugly outcome
Scenario D The NDA wins fewer than 180 seats: 10% probability
Given high expectations of a BJP win, such a scenario would be a negative shock
for the markets. Even if the NDA were to find itself with a plurality of close to 180,
we think it would struggle, and likely fail, to build a wider majority coalition. This
could result in four possible outcomes: 1) a weak and unstable NDA- or UPA-
based minority government, likely to be short-lived; 2) a third front-based majority
government, which would struggle to pursue a coherent policy agenda and to
survive a full five-year term (Figure 10 shows potential configurations of a third
front); 3) a third front-based minority government supported from outside by the
UPA, which would similarly struggle; and 4) early fresh elections after all parties
fail to garner sufficient support to win a parliamentary vote of confidence in a new
government.
And after the election?
Unless the NDA is able to secure a solid outright majority (which we regard as unlikely),
the election is likely to be followed by intensive coalition-forming negotiations with smaller
parties. Figure 11 lists the parties that have entered into pre-poll alliances with the BJP
and the INC, as well as the potential post-poll allies.
The leverage that these parties will enjoy will depend significantly on the size of the NDAs
plurality, i.e., the more seats the NDA wins the fewer parties it will require to establish a
majority in the Lok Sabha and the more it should be able to dictate terms. We believe that
the most promising potential partners are likely to be regional parties such as the AIADMK,
which should be open to agreements that offer them some advantage for their
geographical base.

Fig. 10: Possible third front coalition

Note: X/Y means that either X or Y will be a part of the coalition. Source: Nomura
Global Economics.
Fig. 11: NDA and UPA Key allies


Bear in mind, though, that a slim parliamentary majority would be an unstable one given
the somewhat fractious nature, in our view, of Indian politics. It is very likely, we believe,
that the NDA will have to add several parties to the coalition and therefore accommodate a
range of vested interests from the outset. In this context, we note with interest a recent op-
ed piece by David Pilling of the Financial Times, in which he offers the view that: Mr Modi,
whose leadership style brooks little opposition, has a reputation for getting things done,
suggesting that (although the comparison should not be overdone), there are parallels
between his style and Chinese-style leadership.
22
Mr Pilling continues:
Part of Mr Modis attraction is that, by sheer force of will, he may be able to
override some of the checks and balances of Indian democracy and introduce
some of the clear-headedness of growth-driven China. Under a Modi
administration, the hope is, land will be cleared, permissions will be granted, and
roads and other infrastructure will be built. In this cheerful scenario far too

22
A vote for Modi could make India more Chinese, David Pilling, Financial Times, 19 March 2014.
AIADMK/DMK NCP
SP/BSP JD(S)
Left Parties/AITMC JMM
TDP/YSRC INLD
JD(U) HJC
PDP RJD
BJD TRS
Coalition of regional Parties
Outside Support
INC
BJP Shiv Sena INC NCP
SAD TDP RJD RLD
PMK MDMK JMM IUML
DMDK LJP J&K-NC
HJC
AIADMK JMM SP DMK
BJD MNS BSP TRS
TRS INLD AITMC YSRC
Less likely post-poll allies
AITMC DMK Left parties
YSRC BSP AIADMK
Most likely post-poll allies
Key pre-poll allies
NDA UPA

18
optimistic, according to his many detractors he will do for India in its entirety
what he has been able to achieve for Gujarat.
Here, we see three largely political challenges facing a Modi administration:
Forming and sustaining a coalition in India is seldom a simple task, and one
which may be better aided by a more emollient style, rather than sheer force of
will.
Especially with significant power devolved to the states, governing India as a
whole is inherently a much more complicated process than governing a single
state.
Following on from these two points, expectations especially by the market of
a Modi government may be running ahead of the likely reality because any
economic turnaround will take time.


19
Economic implications
What elections can and cannot change
From an economic perspective, it is important to recognise what elections can and cannot
affect. Growth comprises of two components: the cycle (driven by fiscal and monetary
policies, global growth, supply shocks) and trend (driven by investment, employment and
productivity). Business cycles in any economy will continue irrespective of the government
in power, but elections play an important role in driving fundamentals and in shaping the
investment outlook, which determines trend, or long-term potential, growth.
In India's case, both the business cycle and the trend are at their lows. The OECDs
composite leading index for India shows that the business cycle downturn seen in the last
three years is the worst in the history of the series (Figure 12). Additionally, trend growth
has also fallen from close to 8% in 2005-07 to around 6%, on our estimates (Figure 13).
This drop is a result of both lower investment and a fall in productivity due to weak global
growth, policy flip-flops, delayed government approvals and stressed balance sheets. The
investment cycle has to kick-start if trend or potential growth is to begin to recover. In our
view, India is sitting at the cusp of both a business cycle, as well as trend growth,
recovery.

Fig. 12: OECD's composite leading index for India

Source: OECD and Nomura Global Economics.
Fig. 13: India's real GDP growth and trend

Note: Trend is estimated using the Hodrick Prescott filter.
Source: CEIC and Nomura Global Economics.
Growth has bottomed
Every down-cycle comes to an end, and regardless of the election outcome, we believe
Indias GDP growth has hit the trough. Indeed, Nomuras composite leading index for India
suggests that growth is bottoming out (Figure 14).
The period of consolidation is likely to last a few more quarters. Unlike past cycles, we
expect Indias growth recovery to be gradual as fiscal and monetary policies remain
relatively tight. Additionally, given the build-up of corporate leverage over the last few
years (Figure 15), particularly in the infrastructure sector, a revival of capital markets could
be used to sell assets and deleverage balance sheets, with fresh capex likely to be
announced only after a lag. Hence, we expect growth to rise only marginally to 4.8% y-o-y
in 2014, from 4.7% in 2013.
Even as we expect growth to consolidate in the coming quarters, it is important to
remember that consolidation is a prelude to recovery. Similarly, deleveraging by
companies is an important first step in improving their credit profiles, allowing banks to
lend to higher-risk projects and promoting higher capex over time.

96
97
98
99
100
101
102
103
104
Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-14
OECD's composite leading index for India
Long-run trend
Index
0
2
4
6
8
10
12
1983 1988 1993 1998 2003 2008 2013
Real GDP GDP (trend)
% y-o-y

Sonal Varma - NFASL
+91 22 4037 4087
Aman Mohunta- NFASL
+91 22 4037 5595

20
Fig. 14: Nomura's composite leading index for India

Note: Estimate for Q3 2014 based on preliminary data.
Source: CEIC and Nomura Global Economics estimates.
Fig. 15: Debt-to-equity ratio

Source: Capital Market, CEIC and Nomura Global Economics
Growth momentum to strengthen from 2015
We expect the growth momentum to strengthen from 2015 onwards. In our view, the
cyclical recovery will primarily be supported by better global demand. Nomura expects
global GDP growth to rise from 2.9% y-o-y in 2013 to 3.4% in 2014 and to 3.6% in 2015.
India's investment cycles are closely correlated to global growth cycles; hence better
global growth augurs well for investment (Figure 16).
Debottlenecking of existing investment projects should also drive growth. A stable
government after elections would ease political uncertainty and boost asset prices, which
in turn should boost confidence and revive investment. Despite government efforts in the
past 18 months to revive big ticket projects through the Cabinet Committee on Investments
(Figure 17), this has not yet materialised into any significant activity. However, as demand
and corporate balance sheets improve, we expect investment to pick up, particularly if
government decision-making quickens and policies are stable.

Fig. 16: World GDP vs. India's fixed investment (5y rolling
average)

Source: IMF WEO, CEIC and Nomura Global Economics.
Fig. 17: Projects cleared by Cabinet Committee on
Investment (as of 13 Feb 2014)

Source: Cabinet Secretariat and Nomura Global Economics.

2
4
6
8
10
12
98
100
102
104
Sep-99 Sep-02 Sep-05 Sep-08 Sep-11 Sep-14
Non-agriculture GDP (2qma), rhs
Nomura's composite leading index, lhs
Index % y-o-y
40
50
60
70
80
90
100
110
120
130
Mar-93 Mar-97 Mar-01 Mar-05 Mar-09 Mar-13
BSE500 Ex Banks
%
4
6
8
10
12
14
16
18
3
4
5
6
1986 1990 1994 1998 2002 2006 2010 2014 2018
World real GDP growth, lhs
India's real fixed investment, rhs
% y-o-y
% y-o-y
Cost
(USD bn)
Power 68.8 105
Petroleum 15.8 38
Commerce and Industry 5.4 78
Coal 2.7 46
Civil 2.5 1
Shipping 2.5 15
Mines 2.1 4
Railways 1.4 4
Chemicals 0.8 1
Road 1.5 6
Steel 13.2 5
Total 116.9 303
Ministry Count

21
Macroeconomic imbalances to gradually correct
Very loose fiscal and monetary policies worsened Indias macroeconomic imbalances
during 2007-12, resulting in double-digit inflation, an unsustainable current account deficit
and a falling savings rate. However, we expect these imbalances to correct over the
coming years, supported by three factors: 1) tight monetary policy, which will gradually
disinflate the economy and encourage financial savings; 2) fiscal consolidation, which
should crowd-in private investment, weaken consumption (initially) and boost public
savings; and 3) better governance and stable policies (depending on elections), which
should boost productivity, encourage investment and ease supply-side constraints. As the
macro imbalances correct, some of these tight policies may initially prevent growth from
rising very sharply, but stability, in our view, will encourage investment and support higher
trend growth in the medium-term (Figure 18). Additionally, as inflation eases, this should
open up room for lower rates in the medium term.

Fig. 18: Indias macro-economic imbalances should correct over time

Past elections and their economic impact
In the last 20 years, India has experienced different political establishments: a third front in
1996-98; NDA rule from 1998 to 2004; the first UPA administration (UPA-I) in 2004-09 and
the second, or UPA-II, in the last five years (Figure 19). A comparison of the different
political regimes shows that except during UPA-I, India's real GDP growth has averaged
6.0-6.7% y-o-y. Growth was strongest during UPA-I (8.4%), but this was triggered mainly
by higher global growth. The third front regime was marked by political instability and a
short-lived government, so while overall growth was close to 6%, this period was marked
by lower investment and relatively high inflation.
India's economic fundamentals improved during the NDA regime. The current account
moved into a surplus and lower minimum support prices led to lower inflationary
pressures. However, the rural terms of trade worsened during this period. In contrast, the
rural terms of trade improved sharply during UPA-II, but at the expense of a sharp decline
in fundamentals, with much higher minimum support prices (and other policies) feeding
into double-digit inflation, rising subsidies and an unsustainable current account deficit.
It is perhaps too simplistic to generalise, but history does suggest that while better global
growth in the coming years should support domestic growth, an NDA regime would be
marked by relatively lower inflation, while the UPA and the third front regimes could see
fiscal and inflationary concerns persist.

Fig. 19: Economic performance during last four election cycles

Source: CEIC and Nomura Global Economics.

Real GDP
growth
Current
Account
Balance
Fiscal
balance
CPI
Inflation
Agri terms
of trade
(CAGR)
USDINR
(CAGR)
MSP
(avg annual
% inc)
Subsidies
(% of GDP)
Third front FY97-FY98 6.1 -1.2 -5.2 7.0 2.4 -5.4 8.3 1.1
NDA FY99-FY04 6.0 0.3 -5.5 4.5 (0.9) -3.6 5.2 1.4
UPA-I FY05-FY09 8.4 -1.2 -3.9 6.2 2.4 0.0 9.1 1.6
UPA-II FY10-FY14 6.7 -3.3 -5.3 10.3 3.8 -6.0 9.7 2.3
Period average

22

A peek at the election manifestos
Election manifestos provide a broad direction about the economic ideology of the party.
Figure 20 compares the BJP and the INC manifestos. The INC manifesto suggests that its
focus will remain on rights-based policies that promote equity. Hence, apart from the
existing rights to food, employment, education and information, Congress intends to enact
legislation providing the right to health, housing and a pension. The manifesto also talks
about boosting infrastructure growth, creating new cities and fiscal consolidation, but such
entitlement-based programs will eat into the limited fiscal space, in our view.
The BJP's manifesto, on the other hand, relies on effective delivery/implementation and
better rural infrastructure to result in rural prosperity. Rather than promoting higher support
prices as promised by Congress, the BJP plans to develop the agriculture sector by
increasing public investment and boosting productivity. However, the BJP is short on
funding details for the various infrastructure and urbanisation projects.
Overall, the BJPs policies seem more centre-right, as expected, versus Congress more
centre-left policies. Ultimately, how effectively these promises translate into reality will
depend on the ability of the next government to implement them. In Box 2, we list what we
believe to be the 10 most important reforms that the incoming government should do in its
first 100 days to get the economy back on track.

Box 2: 10 reforms to do in the first 100 days
Prop up investments
1. Set up a time-bound clearance mechanism for big ticket projects by ensuring more/better coordination between
ministries.
2. Adopting transparent mechanisms to transfer national resources and clearly lay out guidelines on environmental
protection.
3. Revisit the land acquisition policy and devolve more power to the states, thus preventing state-level issues from
becoming a binding constraint on the nation.
4. Recapitalize public sector banks and lower the governments stake in some PSU banks.
Fiscal reform
5. Set up a timeframe to resolve the issues between the centre and the states on the goods and services tax (GST).
6. Increase the pace of hikes in diesel prices to reduce fuel subsidies; rationalize the fertilizer subsidy and improve the
delivery model for food subsidies.
Tackle inflation
7. Do away with the indexation of MG-NREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme)
wages to CPI and keep MSP increases in check.
8. Focus on increasing productivity (and rural incomes) by providing better infrastructure in both production and
marketing of agricultural produce. Discourage collusion in agri-marketing so that price signals reach the farmers
undiluted, allowing them to respond with higher supply.
9. Stop tweaking trade policies regarding agricultural produce and incentivize private sector investment in agriculture.
10. Speed up implementation of the Delhi-Mumbai Industrial Corridor.


23

Fig. 20: Election manifestos: INC and BJP

Source: www.inc.in; www.bjp.org and Nomura Global Economics.

Election scenarios and the economy: good, bad and ugly
How quickly India recovers and the speed of adjustment in the macro imbalances will
depend on the election outcome. We lay out the difference in the economic and reform
outlooks under the four election scenarios we listed in the previous section (Figure 21).

Indian National Congress Bhartiya Janta Party
Centre Left Centre Right
Right to health, pension, housing, entrepreneurship and dignity in working conditions Control price-rise, generate employment and encourage entrepreneurship
Achieve 8% growth within the next three years Tackle corruption, speeds up decision making and address policy paralysis
Announce a detailed job agenda to create 100m new jobs Improve delivery of government services and ensure faster clearances
Give states more fiscal autonomy while urging fiscal discipline
Involve state governments in promotion of foreign trade and commerce
Implement the National Manufacturing Policy, target 10% growth in manufacturing; minimum
tariff protection for manufacturing
Encourage savings
National Investment Facilitation Authority to resolve delayed projects Closer coordination between center and state governments on mega projects
Transparent and competitive public private partnership (PPP) model Rationalise interest rates to boost manufacturing
New financing models for long-term funds Single window clearances; transparent and time bound decision making on environment
No room for aversion to foreign capital FDI to be allowed in most sectors barring in multi-brand retail
Rigorous and time-bound environmental appraisals Price Stabalisation Fund to tackle inflation
Improve India's 'Ease of Doing Business' rank from 134 to 75 in the next five years Develop labour intensive manufacturing zones
Focus on value addition and exports to reduce current account deficit
Increase India's investment rate to 38% Set up global hubs of manufacturing
Committed to industrial corridors such as the DMIC; timely completion of freight corridors Expedite the work on freight corridors and industrial corridors
Connect all million-plus cities by high speed rail Build coastal and border highways and connect remote states
Create 100 new urban clusters Create 100 smart cities focusing on concept of twin cities and satellite towns
Develop inland waterways and regional rapid transit systems Diamond quadrilateral project (high speed trains)
Make a transparent policy for development of natural resources and set up an independent
regulator to monitor the allocation
Port-led model of economic development
100% electricity in urban areas and 94% in rural areas. Set up a national fibre optic grid
Thrust to renewable sources of energy (solar, wind and nuclear) Commitment to international property rights and patents
Improve urban infrastructure with more funding and greater flexibility to local governments
Create a national policy on utilisation of natural resources and use e-auctions to transfer
them
RBI must strike a balance between price stability and growth Reduce NPAs in banking sector
A clear roadmap for dealing with the issues regarding public-sector banks Strong regulatory framework for NBFCs
Implement the recommendations of FSLRC Banking sector reforms to enhance ease of access and accountability
Achieve a fiscal deficit of 3% of GDP by FY17 and codify the same in the FRBM Act Strictly implement fiscal discipline without compromising on asset creation
Ensure that GST and DTC are enacted within one year Bring on board all state governments in adopting GST
Subsidies that are absolutely necessary and only to the absolutely deserving Overhaul dispute-resolution mechanism
Clear policy on tax assessment of foreign firms and M&As Rationalise and simplify tax regime
Waive all central and states taxes on exports
Reservations for economically weaker sections of the society in education and employment Focus on housing, tourism and other labour-intensive industries to generate jobs
Enforce minimum wage laws Extend access to modern financial services to labour
Health insurance and pension cover for unorganised workers Strengthen the pension and health insurance for all kind of labours
Strict implementation of the Contract Labour Act Revisit the Apprenticeship Act to facilitate our youth to Earn while they Learn
6 million new jobs in the health sector Increase public spending on education to 6% of GDP
Increase health expenditure to 3% of GDP. Focus on primary healthcare and provide
universal and quality healthcare
Provide universal health care focusing on accessibility, affordability and quality. Improve
public healthcare infrastructure
Pension cover, life and disability cover, health and maternity benefits Ensure effective implementation of the Right to Education, Right to Food Security Act.
Expand the national health insurance scheme and implement a universal pension scheme
for elderly, destitute and widows
Rights of the Persons with Disabilities bill
Ensure 100% access to drinking water in rural areas Access to potable drinking water and sanitation
Increase funding for village level administration Self governance at local level and more power to village level administration
Increase household access to LPG and kerosene National gas grid to provide access to gas to every household
Housing scheme for all poor rural households and expanded to urban poor households A massive low-cost housing programme
Review the public distribution system (PDS)
Higher MSP for farmers Reform the APMC act
Concessional loans to farmers
Increase public investment in agriculture and rural development and enhance profitability in
agriculture
Nurture PPP model in building infrastructure in the agri sector A single national agriculture market and unbundle Food Corporation of India
Increase irrigated land by 10 million hectares An agri-rail network to improve supply chain in agri sector
Increase coverage of crop insurance Focus on water management and providing access to permanent sources of irrigation
Expand the rural road program Connect
Leverage technology to disseminate real-time data on agri prices to all stakeholders
E-biz project across the country to reduce approval process Thrust on e-governance and digitizing government records
Digitize all land records Time-bound deliver of government services
Green National Accounts by FY17 to reflect cost of environment degradation Major thrust to develop tourism
Provide Aadhaar (Unique ID) to all citizens and use Direct Benefit Transfer platform to
ensure time-bound delivery of benefits
A National Land Use Policy' for scientific acquisition of non-cultivable land and its
development
Labour
Social sector
Agriculture. &
rural sector
Others
Key planks
Centre-state
relationship
Economic
agenda
Investment &
physical
infrastructure
Financial sector
Fiscal & tax
policies

24
Fig. 21: Economic outlook under different election scenarios

Note: Fiscal balance for 2014 refers to FY15. Source: CEIC and Nomura Global Economics.

The good scenarios: Scenario A (NDA >220 seats) and B (NDA: 200-219 seats)
We see scenarios A and B as a medium-term positive for the economy and reform
prospects. With fewer coalition partners, we believe Mr Modi would be able to appoint a
cabinet of his choice, giving the government more elbow room to carry out reforms without
excessive pressure from coalition partners. Under these scenarios, we forecast a cyclical
recovery. In addition, we expect gradual disinflation and a boost to investments to lift
potential growth. Reforms would move forward, but more importantly there would be better
implementation/execution. We believe India's sovereign credit rating outlook is likely to be
upgraded from Negative to Stable (by Standard & Poors).
Reform outlook
We expect the new government to come up with a 100-day plan to revive the economy,
aimed at speeding up execution and bettering ministerial coordination. On the fiscal side, a
BJP-led government is likely to rejig the mix of government expenditure towards higher
capex (including linking expenditure under MGNREGS to asset creation) and pursue a
more aggressive privatisation plan for public sector enterprises. Tax incentives to boost
financial savings are likely. The government is likely to commit to speeding up the
implementation of the GST.
The medium-term focus on creating jobs, boosting infrastructure and the manufacturing
sector, would mean efforts to accelerate the Delhi-Mumbai Industrial Corridor, other freight
corridors and initiate a national bullet train network. Urbanisation would be in focus, with a
plan to improve infrastructure in existing metropolitan areas, second-tier cities and
development of new cities. We would also expect greater state-level competition and for
the centre/state relationship to improve as the centre would likely devolve some
responsibility for policy execution to state governments. This could also facilitate
consensus building on other national issues such as the GST.
Finally, on agriculture, we would expect smaller increases in minimum support prices,
boosting productivity through better marketing infrastructure, a focus on developing the
other non-cereal areas of the rural economy, incentives for agri-business investment and
reduced interference in agriculture trade policies.
Economic outlook
We expect prudent policies and faster execution to ease Indias macroeconomic
imbalances, i.e., gradual disinflation and a stable current account deficit, which are already
correcting due to the past slowdown and policy tightening. As supply-side constraints ease
and inflation moderates, we expect the RBI to be able to meet its January 2016 CPI target
of 6%, enabling it to hold the course on rates in 2014-15, and thereafter, cut rates.
We expect India to attract substantial capital inflows, buoying equity prices and enabling
companies to raise more equity, thereby reducing leverage. We expect rising
investments and greater productivity gains to boost potential growth from about 6.0%
now to 6.5% y-o-y, helping to sustain higher growth. We expect faster growth of around
6% y-o-y in 2015, from 5.0% in 2014 and 4.7% in 2013.
We would expect external accounts to experience a turnaround, with the current account
deficit remaining at sustainable levels of around 2% of GDP, due to increased domestic
production (reducing the need for import substitution) and better exports. A sharp surge in
Good Bad Ugly
Scenario A/B: NDA
wins over 200 seats
Scenario C: NDA wins
180-199 seats
Scenario D: NDA wins
fewer than 180 seats
2014 5.0 4.8 4.8
2015 6.0 5.5 5.2
2014 8.3 8.5 9.0
2015 7.0 7.5 8.0
2014 -4.1 -4.5 -5.2
2015 -3.6 -4.0 -5.0
2014 -2.0 -2.1 -2.5
2015 -2.3 -2.5 -2.8
2014 8.00 8.50 8.50
2015 8.00 8.50 9.00
GDP growth (% y-o-y)
CPI inf lation (% y-o-y)
Fiscal balance (% of GDP)
Current account balance (% of
GDP)
RBI Policy rate (%, end period)

25
capital flows both portfolio and FDI flows would result in a large balance of payment
surplus.
Finally, while there is uncertainty on how a BJP government would deal with the large
fiscal arrears inherited from the previous regime in the first year, we would expect fiscal
consolidation to remain a key objective in the medium term, aided by a focus on
privatisation. We expect the fiscal deficit to moderate from 4.6% of GDP in FY14 (year
ending March 2014) to 4.1% in FY15 and 3.6% in FY16.
The bad scenario: Scenario C (NDA: 180-199 seats)
In this scenario, a hotchpotch BJP-led coalition will probably survive, but it may mean
someone other than Narendra Modi as prime minister. While the policy environment may
still be better than it has over the last five years, a larger number of coalition partners
would reduce the room for manoeuvrability on difficult reforms. The business cycle
recovery may follow, but trend growth may not rise.
Reform outlook
Under such a coalition government we would expect executive decisions to be taken, but
legislative reforms that require parliamentary approval to prove difficult. On the fiscal front,
the ability to rationalise subsides and welfare expenditure would be more limited and
sticking to the path of fiscal consolidation would be challenging.
Economic outlook
An economic revival in this scenario could come on the back of better global growth and
faster executive decisions. Hence, debottlenecking of investment projects could still drive
faster growth (to 5.5% in 2015 from 4.8% in 2014), but a lack of decisive reforms would
limit new investment and trend growth is likely to remain close to 6.0%. Business cycles
will still continue, but around this trend. A higher fiscal deficit (-4.5% of GDP in FY15
versus -4.1% in the good scenario) and a weak supply response would mean inflationary
pressures are likely to persist, requiring 50bp worth of additional repo rate hikes to meet
the RBIs medium-term inflation targets.
The ugly scenario: Scenario D (NDA <180 seats)
Under this scenario of a third front
23
or weak coalition government, political uncertainty
would likely delay capex decisions. The business cycle would continue, but trend growth
could fall further. Investor disappointment would likely mean large capital outflows,
resulting in a resurgence of balance-of-payments pressure. The sovereign credit rating
could be downgraded as credit risks are likely to re-emerge.
Reform (or lack thereof) outlook
Political instability and the lack of a common economic agenda would raise policy
uncertainty. Given the leftist inclination of many regional parties, fiscal populism may take
over, with increased subsidies and welfare spending (e.g., diesel price hikes will most
likely stop), leaving the potential for a sovereign rating downgrade.
Economic outlook
Increased capital outflows and weak confidence would keep GDP growth muted at around
5% for the next two years (4.8% in 2014 and 5.2% in 2015), in our view. Political instability
would delay capex decisions and potential GDP growth could fall to around 5.5%. The
fiscal deficit would remain at around 5% of GDP, meaning an increased tax burden on
corporates and high-income individuals, as well as higher taxes on luxury goods to fund a
more populist stance. CPI inflation would remain around 9% in 2014 and 8% in 2015 due
to continued supply-side bottlenecks, which would require 100bp worth of additional repo
rate hikes. Corporates and banks would find it difficult to raise capital in such a scenario,
leading to a weakening of credit quality.

23
Though the third front government is credited with presenting what is often called the Dream Budget in 1997, the
problems today lie well beyond the finance ministry's domain. They are more about coordination among different
ministries, which will be difficult in a third front government given the individual ambitions of regional leaders and the
lack of a common economic agenda.

26
Fig. 22: Reform scenarios

Source: Nomura Global Economics estimates.

Scenario A Scenario B Scenario C Scenario D
To prop up investments
Time bound clearance mechanism High Medium Low Doubtful
Transparent mechanisms to transfer national resources Medium Medium Low Low
Relook at land acquisition policy Medium Low Doubtful Doubtful
Recapitalize public sector banks Medium Medium Medium Low
Fiscal reforms
Setup a timeframe to resolve the negotiations on GST High Medium Low Doubtful
Revisit the Food Secuirty Bill Low Low Doubtful Doubtful
Increase the pace of monthly hikes in diesel prices Low Low Doubtful Doubtful
Increase fertilizer prices Medium Low Doubtful Doubtful
Privatisation of public sector enterprises Medium Medium Medium Doubtful
Tackle inflation
De-link MG-NREGA wages to CPI Low Low Doubtful Doubtful
Low rise in minimum support price High Medium Low Doubtful
Providing better infrastructure for agriculture High Medium Doubtful Doubtful
Liberalize and stabilize agri-trade policies Medium Medium Low Doubtful
Boost manufacturing
Acclerate implementation of the Delhi Mumbai Industrial
Corridor and National Manufacturing Policy
High High Medium Low
Labour law reforms
Low Low Doubtful Doubtful
Actions
Possibility

27
Foreign and regional policy
Foreign policy: Deeper Indo-Japanese ties?
As is often the case in elections, to date foreign policy has barely featured in the current
campaigning in India. We are therefore cautious about forecasting how the foreign policy
of a Modi-led administration might differ, if at all, from that of the current Indian
government.
However, we did note with interest Mr Modis one major reported campaign reference to
foreign policy in a 23 February speech in Pasighat in the state of Arunachal Pradesh which
hosts a long-disputed border with China, when he called on Beijing to give up its
expansionist mindset.
24
Despite a commitment by then president Hu Jintao in February
2007 to find a resolution (more recently reiterated by Chinese premier Li Kiqiang in
particular), we doubt that Chinas one remaining major land border dispute is likely to be
resolved in the foreseeable future.
As a consequence, we expect a Modi-led government to find common cause with the
government of Shinzo Abe in Tokyo over China which we believe likely to underpin a
deepening strategic relationship between India and Japan. We also expect that this will
spill over positively into deeper economic ties, especially in terms of potential Japanese
inward investment to India, expanding on the success which Mr Modi has had over the
past couple of years in particular in persuading Japanese corporates to look favourably
upon Gujarat as an investment destination.
25

Regional policy: A potentially less dangerous
neighbourhood?
The American statesman Henry Kissinger is often credited, possibly apocryphally, with
having coined the phrase India lives in a dangerous neighbourhood. However, even
putting to one side Sino-Indian border tensions, it is clear that neighbourhood politics are
likely to continue to be a significant feature of Indias foreign policy challenges.
On 23 February, at a campaign rally in Assam, Mr Modi made a second foreign policy-
related statement, calling for Hindu migrants from Bangladesh to be accommodated in
India, with all states sharing the burden, while calling on non-Hindus to be sent back to
their home nations. He added that all Hindus who are harassed and suffer in other
countries, including Pakistan, should be welcomed by India. We would expect Indias
relations with Bangladesh to remain potentially volatile under a Modi administration,
including over water; but, at this stage, we see no reason why the general improvement in
cooperation which followed Bangladesh Prime Minister Sheikh Hasinas January 2010
state visit to India should not continue. Better relations with Bangladesh have the added
advantage of providing a potential gateway to Myanmar, consistent with Indias high
priority of greater energy security.
Potentially more difficult are relations with Pakistan, which continues to struggle with
governance challenges, the economy, and security (with, we believe, little prospect of any
improvement in the latter as the NATO drawdown from Afghanistan is completed this
year). Counter-intuitively, and on the principle which often used to be cited for the Middle
East that it takes a hardliner to make peace (but at the risk of being proved totally wrong),
we wonder if Mr Modi may reach out to his opposite number, Nawaz Sharif, in an effort to
resolve long-standing issues between the two countries, including over Kashmir.
26
This
would, in our view, be a bold move, but one which would play well domestically in terms of
inter-community relations as well as yielding (well documented) economic benefits to both
countries.

24
Also on 23 February at a campaign rally in Assam, Mr Modi called for Hindu migrants from Bangladesh to be
accommodated in India, with all states sharing the burden, while calling on non-Hindus to be sent back. He added
that all Hindus who are harassed and suffer in other countries, including Pakistan, should be welcomed by India.
25
In October 2013, Gujarat reported that it had achieved Mr Modis target from the previous year (during his visit to
Tokyo) of attracting at least 50 new projects by Japanese companies to the state.
26
Although the first BJP-led government in 1998 launched a series of nuclear and ballistic missile tests shortly after
assuming office, thereby significantly raising tensions with Pakistan which promptly followed suit, Prime Minister Atal
Bihari Vajpayee subsequently made several attempts to improve India/Pakistan relations (although these were
ultimately stymied by the 1999 Kargil War and by hardliners within his own party).

+44 20 7102 3940


28
Furthermore, if the international community and Iran are able to reach a comprehensive
agreement over the latters nuclear programme (and we see a better-than-50% probability
of this being achieved before the end of this year), the prospect of enhanced energy
security for India in the medium-term is again relevant, i.e., via a proposed pipeline to India
from Iran, across Pakistan.
Prime Minister Manmohan Singhs non-attendance of the 2013 Commonwealth Heads of
Government meeting in Sri Lanka marked a sharp downturn in relations between Colombo
and Delhi. In principle, a change of government in the latter could see an improvement.
However, much may depend on the make-up of the incoming coalition, notably whether
the AIADMK, with its strong Tamil voter base, is part of the new government.


29
Equity strategy: The now, the then and the in
between
An important election for the markets
The importance of election stems from the fact that cyclicality in India is not only caused by
business cycles, but also by political and fiscal booms and busts. There have been several
boom cycles in the markets that have followed reforms, and they tend to last as long as
the period of economic growth (Figure 23).

Fig. 23: GDP growth and market returns

Source: Bloomberg, Nomura research.
One can argue that India is now at one such economic bottom. Fiscal excesses have run
their course; the policy environment has hit bottom and many of the macro indicators are
improving. However, there is no guarantee that growth will pick up on its own substantial
effort has to be made in policy and governance before the investment cycle starts to
revive. This is where the election is important. Even though the longer-term story may still
be very attractive, the short-term path that politics chooses can cause opposite reactions
in the market. This is the dilemma facing investors ahead of this election, in our view.
Short-term market reaction could be significant
Election scenarios can lead to changes in perception of the economic outlook
Actual delivery aside, the perception of economic progress can differ widely under different
election outcomes. It is now a well entrenched thought in the market that a BJP-led
government would be better from an economic perspective given its comparatively
progressive thinking on reforms and right-of-centre outlook.
The other issue is that given the vulnerability of the INC, the alternative to the BJP is likely
to be an unstable third front government which would be quite negative for market
perception.
Significant short-term volatility after election results
Past experience shows that elections can be harbingers of significant post-election
volatility too, as can be seen in the table below.

Fig. 24: Sensex reaction after elections

Fundamentals usually dominate in medium term
Markets tend to ultimately follow economic realities. Interestingly, post-election market
reactions have not always sustained, as seen in Figure 25. The initial market reaction of a
-60
-40
-20
0
20
40
60
80
100
-
2
4
6
8
10
12
F
Y
9
3
F
Y
9
4
F
Y
9
5
F
Y
9
6
F
Y
9
7
F
Y
9
8
F
Y
9
9
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
(y-y %) (y-y %)
GDP growth (y-y %)
Sensex returns (y-y%), RHS
Election year 5-day market return after elections
1999 6.9%
2004 -15.9%
2009 20.5%

India equity strategy
Prabhat Awasthi - NFASL
prabhat.awasthi@nomura.com
+91 22 4037 4180
Nipun Prem - NFASL
nipun.prem@nomura.com
+91 22 4037 5030
Sanjay Kadam - NFASL
prabhat.awasthi@nomura.com
+91 22 4037 4187

30
7% upward move in 1999 swung to an 11% down move after nine months. Similarly, the
negative move in the market after the 2004 loss of the BJP eventually turned into a
positive gain. In 2009, however, the market continued to move up as the economy
continued to recover after the global financial crisis.

Fig. 25: Sensex reaction to general elections

Turnaround will take time, even with a strong government
Feedback we have received from investors suggests that they are willing to buy a recovery
even ahead of delivery, as the belief is that a strong government would be in a position to
push the growth agenda decisively. We believe that:
A new government will take time to turn the economy around: In our view,
turning growth around will require significant effort to revive the investment cycle,
which stalled due to several factors, including policy missteps, corporate distress,
and implementation issues. None of these issues can be fixed overnight and may
become a source of disappointment. Also, the fiscal situation will be tough to
manage given the postponement of subsidies, one-time revenues and slow
growth. Fiscal management typically involves an increased consumer burden,
which may help prolong the economic slowdown. We note that the recent
behaviour of the market is consistent with expectations of a growth recovery,
which may disappoint in the short term.
The macro situation may continue to improve: Our positive stance on the
market is driven not by a positive view on the growth recovery, but by an
expected reduction in macro stress beyond market expectations. The first of
these, a reduction in the current account deficit, has largely played out. We also
believe that inflation will remain under control. If anything, a strong government
could facilitate this process through higher fiscal discipline in the short term and
increased emphasis on the supply side in the longer term.
Fiscal challenges will have to be tackled: This should be positive for rates in
the medium-term, in our view. Additionally, solving fiscal challenges will imply
positive action on controlling subsidies, which, we believe, will be positive for the
oil & gas sector (as oil subsidies are the least controversial in terms of removal
and the recent experience of raising diesel prices has not involved any political or
electoral pushback).
Sound policy moves could reduce stress in the system: This would be
positive for medium-term growth and beneficial in reducing distress in corporate
India in the near term. These could include an easing of supply-side bottlenecks,
improved coordination between government departments and quicker decision-
making. This should be positive for asset owners in general.
Overall, therefore, we are fairly convinced that:
The growth recovery will be slow. The investment cycle will also take time to
recover, and will require a serious policy effort.
Macro imbalances will ease aided by a strong government. A weak government,
on the other hand, could add to macro distress through the external account
(capital outflows) and consequently a weaker currency.
Fiscal challenges mean continued oil-sector reforms.
Result
1 month
prior (%)
1 month
later (%)
6 months
later (%)
9 months
later (%)
Comments
1999: BJP comes to power 0.5 -8.2 7.4 -10.5 Poor economy drowns out initial gains
2004: BJP loses power -4.8 -2.8 6 14.5
Improving economy takes over the initial
disappointment
2009: Congress wins by a
bigger margin
9.6 26.8 37.3 39.5
Market reacts positively to political stability in
the backdrop of post-GFC global market recovery

31
Portfolio construction depends on pre-election returns,
election results and post-election reaction
The rally should not be over before it begins
The value-add in predicting a market reaction on a favourable or adverse election result is
close to minimal, in our view. We believe that investors should pay close attention to pre-
election sector moves and valuations going into the election. Investors should also note
that post-election performance of the market has often been misleading as economic
realities start to take over after elections. We expect the economic turnaround to take time
and the build-up in the market may not be pricing in slow growth in the medium term.
BJP-friendly opinion polls
As shown in Figure 26, opinion polls after December (following BJP victories in key state
elections) have shown a higher margin of victory for the BJP. This complicates the market
response to elections.

Fig. 26: Recent opinion poll results

Source: News agencies, Nomura research.
have been correlated with significant outperformance by rate- and domestic
growth-cyclicals
The appropriate cut-off point to understand the impact of incoming opinion polls on market
and sector performance is the beginning of September last year, shortly before the BJP
victories in key state elections. This was when we first saw a distinct revival and
outperformance of hitherto beaten-down rate- and domestic growth-cyclicals, led by banks
and the capital goods sector (Figure 27).

Fig. 27: Sector performance relative to market

Note: BSET: IT services; BANKEX: Banks; BSETHC: Pharma; BSETMCG: consumer; BSETCG: Capital goods.
We note that, in addition to positive political momentum, financials have also enjoyed the
tailwind of positive inflation and current account data since January. Offsetting this,
however, has been a volatile global risk environment, dominated by the Fed taper, the
main event of which was the sudden spurt in the EM crisis in the third week of January.
This led to sharp underperformance by banks, which was erased after the formal
announcement of the voting schedule on 5 March, to end ahead of the market YTD.
Conducted in Month(s) Polling Organisation/Agency
UPA NDA BJP
JanuaryMarch 2013 Times Now-CVoter 128 184
AprilMay 2013 Headlines Today-CVoter* 132 (without Modi); 155(with Modi) 179(without Modi); 220 (with Modi)
May-13 ABP News-Nielsen 136 206
Jul-13 The Week - Hansa Research 184 197
Jul-13 CNN-IBN and The Hindu by CSDS 149157 172180
Jul-13 Times Now-India Today-CVoter 134 (INC 119) 156 131
AugustOctober 2013 Times Now-India TV-CVoter* 117 (INC 102) 186 162
December 2013January 2014 India Today-CVoter 103 (INC 91) 212 188
December 2013January 2014 ABP News-Nielsen 101 (INC 81) 226 210
Jan-14 CNN-IBN-Lokniti-CSDS 107127 211231 192-210
JanuaryFebruary 2014 Times Now-India TV-CVoter* 101 (INC 89) 227 202
Feb-14 ABP News-Nielsen 92 236
Feb-14 CNN-IBN-Lokniti-CSDS 119139 212232 193-213
Mar-14 NDTV-Hansa GCR 126 229 195
90
100
110
120
130
140
150
160
170
S
e
p
-
1
3
O
c
t
-
1
3
N
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v
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3
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e
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a
n
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4
F
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4
M
a
r
-
1
4
Base
100=2Sep'13
BSET BANKEX
BSETHC BSETMCG
NIFTY BSETCG

32
and India has outperformed global peers
Meanwhile, the Indian market has outperformed global equities as well as key regional
markets since September (Figure 28).

Fig. 28: India market performance relative to global peers

Note: MXIN: MSCI India; MXAPJ: MSCI Asia-Pacific ex Japan; MXWD: MSCI World; MXWO: MSCI Developed Markets;
MXEF: MSCI Emerging Markets. Source: Bloomberg, Nomura research.
Sector rotation has kept the market multiple in check
Significant outperformance by India compared to its global peers and a sharp
outperformance by the financials and capital goods sectors since September may convey
a sense that market valuations, at current levels, must be firmly pricing in a market-friendly
election outcome.
However, this is not the case at an aggregate level and current market valuations are far
from pricing in such an overly optimistic or exuberant result scenario. This is because
there has been major sector rotation over this period, which has kept market valuations in
check: the rise in rate-cyclicals and domestic growth names has been offset by lacklustre
performance and recent absolute price declines for IT services and pharma stocks.
The markets 12-month forward consensus-based earnings multiple has expanded by a
mere 7% since 2 September. Further, at 13.6x, the P/E multiple is unchanged YTD and is
trading at a 4% discount to its most recent 3-year average note that two of these three
years had GDP growth at sub-5% and a 9% discount to its most recent 5-year average.

Fig. 29: Sensex 12-month forward consensus-based earnings multiple

Election results and likely reactions conventional wisdom
A scenario analysis of elections is important from two aspects: 1) judging the overall
reaction of the market in the post-election very short term; and 2) how to position after the
initial market reaction.
As we said before, it is important to remember that some of the positive elements may play
out over the next two months, thereby limiting the upside available after the election.

90
95
100
105
110
115
120
125
130
S
e
p
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3
O
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a
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e
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M
a
r
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1
4
Base
100=2Sep'13
MXIN MXWO MXEF
MXAPJ MXWD
4
9
14
19
24
29
34
A
p
r
-
9
7
N
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v
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D
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J
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(x)
Sensex 12-m fwd P/E
5-year average = 14.7x
3-year average = 14.1x
13.6x on
3 Apr'14
12.7x on 2 Sep'13
13.3x on 1 Jan'14

33
Fig. 30: Four election scenarios and likely sector reaction

Source: Nomura research
Sector positioning for key sectors
A pre-election rally could go further from here, as: 1) valuations are still reasonable; and 2)
few domestic cyclicals still trade at deep discounts to historical averages.
Here is our view on key domestic cyclical sectors before the election:
Financials: still not expensive compared to historical averages. We expect the
macro picture to remain supportive. The sector could sell off in an unfavourable
election result and should be bought on a correction, in our view. However, a
poor election outcome could be quite negative for the policy environment and for
asset quality. Investors should hedge by concentrating portfolios on private banks
going into the elections.

Fig. 31: Bank sector P/E multiple premium/discount to Sensex

Note: BANKEX index stocks. Source: Bloomberg, Nomura research.
Capital goods: valuation premium to the Sensex is approaching historically high
levels. We would be sellers on further up-moves prior to the election. Further, we
believe that a rally after even a favourable election results would not be sustained
in the absence of a quick recovery in the capex cycle.

Scenario Immediate
market reaction
Medium-term reaction Scenario positive for: Scenario negative for:
A) The NDA wins over 220 seats
(50% prob) - best market outcome
Positive Positive, though there could be
disappointment on growth in the
short-term
Financials, asset owners in
inf rastructure (power, roads,
ports), oil & gas, IT svcs af ter
correction
Consumer
B) The NDA wins 200-219 seats
(25% prob)
Positive Positive, though there could be
disappointment on growth in the
short term
Financials, asset owners in
inf rastructure (power, roads,
ports), oil & gas, IT svcs af ter
correction
Consumer
C) The NDA wins 180-199 seats
(15% prob)
Negative Neutral IT svcs, pharma, banks af ter
correction
Consumer, cap goods
D) The NDA wins f ewer than 180
seats (10% prob) - worst market
outcome
Negative Negative IT svcs, pharma, consumer All domestic cyclicals
-60
-50
-40
-30
-20
-10
M
a
r
-
0
6
S
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p
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M
a
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M
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4
(%)
Banks P/B prem/disc to Sensex

34
Fig. 32: Capital goods sector P/E multiple premium/discount to Sensex

Note: BSETC index stocks excluding LT, PUNJ, SADE and PIPV. Source: Bloomberg, Nomura research.

Oil and gas: the sector is a positive play given fiscal constraints. Even a weak
government would likely continue with oil reforms, in our view. The sector trades
at a deep discount to historical averages.

Fig. 33: Oil & gas sector P/E multiple premium/discount to Sensex

Note: BSEOIL index stocks. Source: Bloomberg, Nomura research.

Infrastructure: the sector remains cheap and is a binary play on election results.
We prefer to buy asset owners. However, an unfavourable election result could
change the direction of these stocks, and vice versa.
Technology: valuations are approaching reasonable levels following the recent
price correction. There could still be some one-time risk from an INR reset on
favourable election results. We believe the sector offers a good hedge against
taper risk through the year. Stocks should be bought on a potential dip, in our
view. We believe that top-tier companies will deliver earnings growth of close to
16% over the next two years, which would likely drive stock performance.

0
20
40
60
80
100
120
M
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(%)
Cap goods P/E prem/disc to Sensex
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M
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S
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M
a
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-
1
4
(%)
Oil & gas P/E prem/disc to Sensex

35
Fig. 34: IT services sector P/E multiple premium/discount to Sensex

Note: BSET index stocks. Source: Bloomberg, Nomura research.

Pharmaceuticals: valuation premiums have corrected recently. We expect
earnings delivery to remain strong. Valuations could correct on potential INR
appreciation in the case of a favourable election outcome. The sector should be
bought into on dips, in our view.

Fig. 35: Pharma sector P/E multiple premium/discount to Sensex

Note: BSETHC index stocks. Source: Bloomberg, Nomura research.

Consumer: the sector remains a sell in both pre- and post-election scenarios.
Autos: we remain negative on the sector given our expectation that growth
issues and fiscal challenges will continue to weigh on consumer discretionary
spending.
Utilities: valuations remain attractive. The sector could be a big beneficiary of
potential post-election reforms. Further, stocks should benefit from a peaking of
interest rates.
Telecom: the sector is not really affected by the election, in our view, and we
remain cautious on valuation and competitive intensity.
Metals: the sector is not really affected by the election, in our view, and we
remain cautious on China growth concerns.

-50
-30
-10
10
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50
70
90
M
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(%)
IT svcs P/E prem/ disc to Sensex
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a
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(%)
Pharma P/E prem/ disc to Sensex

36
FX strategy: INR to ride on NDA-wave
Our baseline view that the NDA wins over 200 seats (75% probability) is likely to sustain
recent positive INR momentum. We believe a victory of around 220 seats (to which we
assign a 50% probability) or more would see spot USD/INR trade towards the 58-figure
level soon after the result (based on spot reference of 60.09, 4 April), implying around a
4.5% appreciation (against USD) from the current FX forward
27
(60.70). We expect the
short-term positive sentiment to be supported by the perceptions of greater political
stability, investment liberalisation and structural reforms (see Asia Special Report: 2014
outlook: Growing divergences, 26 November 2013).
Combined with increased monetary policy credibility, lower inflation, rising local and global
growth expectations, net capital inflows should easily finance a narrowed current account
deficit (at USD4.1bn in Q4 2013; Figure 36). We expect this to emerge from both net
foreign equity and bond inflows, though the potential for bond inflows may be more
significant in part because of lighter current positioning. Net foreign bond inflows from end-
December 2013 to 26 March 2014 rose by USD5.6bn, but this followed USD13bn of net
selling from end-May to November 2013, when foreign bond ownership fell from 4.0% of
market capitalization to just under 3.0%. The RBIs inflation targeting bias should also
support bond investor sentiment, in our view. Our equity strategists remain positive on the
outlook for the SENSEX, forecasting 24,700 by end-2014 (22359 as of 4 April). However,
there has already been a substantial USD11.8bn of foreign equity inflows since May 2013,
which has lifted foreign equity ownership by just above 1% of market capitalization to
24.2% in the period (as of 26 March, Figure 37).

Fig. 36: India Improved flow picture

Source: CEIC, Nomura.
Fig. 37: India Foreign positioning in local asset markets

Source: Bloomberg, CEIC, Nomura.
Although we see prospects for short-term INR appreciation and expect our baseline on the
election to be a catalyst for this rally, strong INR performance in 2H14 could be somewhat
limited as the market focuses back on the reality of still subdued growth and weak
investment
28
. Nomura Economics forecasts 2014 GDP growth at 4.8% (4.5-5.0% range for
2014) from 4.7% in 2013, as fiscal and monetary conditions are still tightening. There is
also some risk of the current account deficit widening in part from the government relaxing
import restrictions on gold. Although relaxation may initially be on gold import duties
(currently at 10%), the timing of such moves is likely to be near the Q1 2014 current
account release (due before 30 June), in which we expect a current account surplus. We
note that in the 12 months to June 2013 (ahead of the quantitative restriction on gold
imports imposed on 22 July
29
), the precious metals trade deficit was USD45.7bn, or 49.2%
of the current account deficit (Figure 38). Since then, the precious metals trade deficit has
narrowed to USD0.4bn (Q3 and Q4 2013 average) and accounted for only 9% of the
current account deficit (an average of USD4.6bn).

27
Based on non-deliverable forward fixing on 19 May after the election results on 16 May.
28
We forecast spot USD/INR at 59.2 and 59.5 for end-Q3 and Q4 2014, respectively.
29
As such, the government had been steadily hiking the gold import duty before the introduction of quantitative
restrictions on gold imports (which require 20% of imported gold to be used for exports purposes). The first hike was
announced in January 2012, from 2% to 4%, and the last hike was announced on 13 August 2013, raising the duty
to 10%.
-40
-30
-20
-10
0
10
20
30
40
Mar-05 Jun-06 Sep-07 Dec-08 Mar-10 Jun-11 Sep-12 Dec-13
Net CA and Capital inflows (USD bn)
Current Account (USD bn)
PI+FDI+ECB+NRD (USD bn)
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25%
Jan-08 Mar-09 May-10 Jul-11 Sep-12 Nov-13
Foreign equity positioning (lhs)
Foreign bond positioning (rhs)

Asia FX strategy
Craig Chan - NSL
craig.chan@nomura.com
+65 6433 6106
Prateek Gupta - NSL
prateek.gupta@nomura.com
+65 6433 6197

37
In addition, INR valuation based on our Flow Equilibrium Exchange Rate (FEER) model
has worsened. As noted in our earlier piece (see Asia Insights - Opportunities from shifting
FX valuations, 14 February 2014), INR overvaluation narrowed to 13.5% as of end-
January given the sharp INR depreciation and the improvement in the current account.
Since then, INRs FEER overvaluation has increased further by 2.8pp to 16.3% (as of 26
March) driven by 3.6% appreciation against the NEER basket (Figure 39).
However, despite still soft economic growth and less favourable FX valuations, there is
scope for strong INR performance in 2015. If the government is able to implement
economic/structural reforms to stimulate investment, the combination of the global
economic recovery, lower local inflation, and some scope for RBI rate cuts will see net
portfolio inflows easily fund the current account deficit. Accordingly, we forecast spot
USD/INR at 57.5 by end-2015.

Fig. 38: Gold import curbs are a key driver of current account
narrowing

Source: CEIC, Nomura.
Fig. 39: Asia FX FEER Valuation

Note: Latest FX data as of 26 March 2014. Source: Bloomberg, CEIC and Nomura.

INR in the negative election outcome scenarios
The less favourable scenario is where the NDA wins less than 200 seats (25% probability).
With 180-199 seats (15% probability), Nomuras political analyst Alastair Newton believes
the NDA will be challenged to garner a majority coalition and would be less reform
focused. In particular, should the NDA take fewer than 180 seats (10% probability), this
would be one of the worst outcomes, in which the NDA may not be able to build a majority
coalition.
Given the current high market expectations of a solid NDA victory, and resulting coalition
setting the economy on a new upward growth path, both these scenarios would likely lead
to a notable sell-off in INR. The NDA taking 180-199 seats would likely see a knee-jerk
USD/INR rise back to around 61.5, while USD/INR may rise quickly back towards the 63-
figure if the NDA wins fewer than 180 seats (based on spot reference of 60.09, 4 April).
This could emerge given the notable long INR positioning evidenced from our recent
marketing trips to the US, Europe and Asia. In addition, the significant foreign equity
inflows and rise in foreign ownership versus market cap (the largest percentage market
cap increase in Asia since May 2013) could also see a sharp reversal. Overall, political
instability, capital outflows and greater economic uncertainty would risk sharp INR
depreciation.
-35
-30
-25
-20
-15
-10
-5
0
5
10
-20
-15
-10
-5
0
5
Dec-06 Mar-08 Jun-09 Sep-10 Dec-11 Mar-13
Trade Balance (Precious metals) - Qtrly, $bn
Current Account Balance - Qtrly, $bn (rhs)
Apr-13 Jan-14 Latest
(Apr-13 to
latest)
INR 26.5% 13.5% 16.3% -10.2%
IDR 4.9% -7.2% -3.0% -7.9%
PHP -4.8% -14.7% -14.2% -9.4%
THB 3.7% -5.6% -4.8% -8.6%
MYR -0.1% -4.5% -4.2% -4.1%
TWD -29.0% -29.8% -30.7% -1.7%
CNY -4.9% -3.0% -2.8% 2.2%
SGD -18.3% -18.2% -18.3% 0.1%
KRW -4.7% -2.5% -0.8% 3.9%
HKD 3.9% 6.4% 7.7% 3.8%
Filtered FEER valuation

38
India rates strategy: Glass half full
Elections to sow the seeds of strategic rally
Indian markets experienced a remarkable turnaround in investor sentiment over the last
few months, and INRs performance during this time, despite EM rumblings and
geopolitical tensions, is evidence of this. In mid-2013, however, India was considered
vulnerable on many fronts, especially with regard to external sector vulnerabilities. At that
time, capital outflows and consequent exchange rate pressures led to monetary tightening,
with the Reserve Bank of India (RBI) raising short-term interest rates and tightening
liquidity conditions. Some of the policy responses then led to a reduction of the current
account deficit and a mobilization of FCNR (B) deposits, which allowed the RBI to reverse
some of the liquidity tightening measures in late September.
From a rates perspective, the liquidity tightening measures in July-August 2013 led to
massive rates sell-off. We note that the measures implemented by the RBI were
equivalent to 300bp of rate hikes (Figure 40). This resulted in a massive bear flattening of
the curve. 5yr and 10yr government bonds sold off by as much as 200bp, with the 5yr
bond touching levels above 9.70% (Figure 41). Later, as the RBI unwound the liquidity
tightening measures, bond yields softened. However, bonds could only partially reverse
the sell-off, because the RBI raised the repo rate in response to inflationary pressures.
Since then, bonds have remained generally range bound. The answer to whether a
positive election outcome can result in a significant bond rally is unclear. Here, we look at
the various channels that affect the bond market and analyse how they would be affected
by a positive election outcome. There are two channels that directly affect rates markets:
Monetary policy: It is a bit premature to assume a positive election outcome would result
in monetary easing expectations. Because the RBI is focussed on inflation and given that
the election outcome will not have a near-term impact on the inflation trajectory, we do not
expect the market to immediately price in monetary easing in response to a positive
election outcome. We, therefore, rule out the impact on rates through this channel.
Bond supply demand dynamics: This is another channel through which rates markets
can be directly affected. Again, like monetary policy, a positive election outcome is unlikely
to affect bond supply/demand dynamics significantly. Though, a positive election outcome
can improve the foreign investors perception, this alone is likely not sufficient to change
the bond demand dynamics significantly, as the foreign investors own only a small portion
of Indias bond market. Foreign institutional investors, for example, own less than 2% of
outstanding sovereign debt securities. The largest owners of Indian government bonds are
commercial banks, which own more than 35% of total outstanding government bonds.
Given that banks are already running close to 5% of aggregate deposits as excess
statutory liquidity ratio (SLR), the hurdle rate to increase demand from commercial banks
is high. We note that a positive election outcome and the resulting perception of lower
event risk would increase the bond appetite of domestic investors, but given that the
banking system is already running an excess SLR, this in itself would likely not be
sufficient to create a meaningful rally in bonds, in our view.

Fig. 40: Liquidity tightening measures

Source: Nomura, Bloomberg.
Fig. 41: Bond, swap rates movement


6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14
MSF Rate
Repo Rate
Overnight f ixing
1yr Swap
Liquidity
tightening
measures in
summer
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14
MSF Rate
Repo Rate
5yr swap
5yr Bond
Liquidity
tightening
measures in
summer

Asia rates strategy
Vivek Rajpal - NSL
vivek.rajpal@nomura.com
+65 6433 6106
Prashant Pande - NSL
prashant.pande@nomura.com
+65 6433 6198


39
However, although the discussion has so far been fairly sceptical, there do appear to be
some indirect channels though which a positive election outcome could sow the seeds for
a medium-term rally in bonds several months after a positive election outcome. The two
most important channels through which the election could affect the rates markets in the
medium-term are:
Comfort on fiscal consolidation: We believe this is the most important factor that rates
investors should watch in the weeks following the election. To provide some background,
in response to the global financial crisis, the government provided strong fiscal stimulus to
the economy that has resulted in significant jump in bond issuance since 2008-09 (Figure
42). Given that bond markets bear the pain of funding the fiscal deficit, the evolution of
fiscal dynamics and its effect on bond supply dynamics are key parameters to watch. As
such, fiscal consolidation can go a long way in instilling confidence among rates investors
from a medium-term perspective. Fiscal consolidation efforts will not only lead to a
reduction of bond supply, but also provide the necessary disinflationary impulse that
should also support lower rates.
Improved liquidity dynamics: Banking system liquidity is a critical aspect of fixed income
markets. Monetary conditions in any economy and the resulting cost of capital is not only a
function of the price of money (i.e., policy rates) but also the quantum of money available
in the banking system. Banking system liquidity dynamics have changed dramatically
following the global financial crisis. We note that before the crisis, capital flows led to dollar
buying by the RBI which, in turn, created rupee liquidity in the banking system. This was
main source of primary liquidity creation before 2008-09. However, after 2008-09, the BOP
situation worsened, and open market operations became the primary source of liquidity
creation. Only in late 2013 did dollar buying re-emerge as an important source of liquidity
creation, but this was primarily due to the better-than-expected response of FCNR (B)
deposits. We believe a positive election outcome and resulting fiscal reforms can result in
the re-emergence of dollar buying as the primary source of liquidity creation. This may well
become an important source of deposit growth, which has fallen to 14-15% y-o-y recently
from 23-25% y-o-y in 2007 (Figure 43). An increase in deposit growth creates liquidity in
the banking system which pushes down money market rates. This, in turn, exerts
downward pressure on government bond yields, mainly from a valuation perspective. We
note that excess deposit growth may also feed into the investment portfolio of banks,
which would improve the demand side of supply/demand equation in Indias bond market.
In our base case, we expect 5yr bonds to decline to 8.60% on a positive election outcome.
We would also expect the 5yr bond to breach 8.60% levels (current 9.07% April 4 2014), if
the market receives signals that the government will continue implementing fiscal
consolidation measures. However, in the bad scenarios (Scenarios C and D), where the
market is doubtful of reforms, we would expect the 5yr bond to sell-off. In such a scenario,
we would expect the 5yr bond to rise to 9.25-50%.
In terms of recommendations, we like buying the 3yr-9yr part of the bond curve and
receiving a 3yr-5yr swap, in case the good scenario materialises. We like receiving the
5yr-9yr bond above 9.10% and receiving the 5yr swap above 8.75%. In the case of a bad
political outcome, we would look to pay 1yr swaps.

Fig. 42: Net issuance of sovereign dated securities

Fig. 43: Aggregate deposit growth, y-o-y


-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
(est)
Net Issuance (INR, bn)
10
12
14
16
18
20
22
24
26
28
30
Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14
Aggregate deposits y-o-y

40
Annex A: Abbreviations
Acronym Full Name Leader State(s) of influence
AAP Aam Aadmi Party Arvind Kejriwal North India and some metro areas
AGP Assam Ganno Parishad P K Mahanta Assam
AIADMK All India Anna Dravida Munnetra Kazhagam J Jayalalitha Tamil Nadu
AITMC All India Trinamool Congress Mamta Banerjee West Bengal
BJD Biju Janta Dal Naveen Patnaik Odisha
BJP Bhartiya Janta Party Rajnath Singh All India
BSP Bahujan Samaj Party Mayawati Uttar Pradesh
CPI Communist Party of India S S Reddy West Bengal, Tripura and Kerala
CPI (M) Communist Party of India (Marxist) Prakash Karat West Bengal, Tripura and Kerela
DMK Dravida Munnetra Kazhagam M Karunanidhi Tamil Nadu
HJC Haryana Janhit Congress Kuldeep Bishnoi Haryana
INC Indian National Congress Sonia Gandhi All India
INLD Indian National Lok Dal OM Prakash Chautala Haryana
IUML Indian Union Muslim League E. Ahmed Kerela
J&K NC Jammu and Kashmir National Conference Omar Abdullah Jammu and Kashmir
JD(S) Janta Dal (Secular) H. D. Deve Gowda Karnataka
JD(U) Janta Dal (United) Nitish Kumar Bihar
JMM Jharkhand Mukti Morcha Shibu Soren Jharkhand
LJP Lok Janshakti Party Ram Vilwas Paswan Bihar
MDMK Marumalarchi Dravida Munnetra Kazhagam Vaiko Tamil Nadu
NCP Nationalist Congress Party Sharad Pawar Mahrashtra
PMK Pattali Makkal Katchi G.K. Mani Tamil Nadu
RJD Rashtriya Janta Dal Lalu Prasad Yadav Bihar
RLD Rashtriya Lok Dal Ajit Singh Uttar Pradesh
SAD Shiromani Akali Dal Prakahs Singh Badal Punjab
SP Samajwadi Party Mulayam Singh Yadav Uttar Pradesh
SS Shiv Sena Udhav Thackrey Mahrashtra
TDP Telugu Desam Party Chandrababu Naidu Andhra Pradesh
TRS Telangana Rashtra Samithi K Chandrashekhar Rao Andhra Pradesh
YSRC YS Reddy Congress Jagan Reddy Andhra Pradesh


41
Annex B: The two main coalitions/parties
The National Democratic Alliance (NDA)
The BJP-led NDA was formed in May 1998 to contest successfully, as it turned out that
years general election. It scored a second, and more stable, election success in October
1999 but suffered a surprise defeat in 2004 (in an election called six months before the
end of the five-year parliamentary term).
The NDA currently includes over 20 parties.
30
These parties represent a wide range of
ideologies (to the point where we see the typical centre-right labelling as overly
simplistic), with the consequence that disagreement and split voting is commonplace. Only
eight have seats in the outgoing Lok Sabha, ie the BJP (116 seats), the Haryana Janhit
Congress (1), Marumalarchi Dravida Munnetra Kazhagam (1), the Naga Peoples Front
(1), Shiromani Akali Dal (4), Shiv Sena (11), Swabhimani Paksha (1) and the Telugu
Desam Party (6).
The NDA has no formal governing structure, decision-making responsibility therefore
resting primarily with party leaders a potential complication for the BJP in that, although
Mr Modi is the partys prime ministerial candidate, the partys chairperson is Rajnath Singh
and the parliamentary chairperson is former vice-premier L K Advani (who is widely seen
as a political rival of Mr Modi and who may yet be positioning himself as a potential
alternative premier).
31

The BJP itself was established in 1980 and is Indias second largest party in terms of
parliamentary representation at both the national and state level. However, with its
traditional reliance on support in the north and west of the country, it would be erroneous
to refer to it as a true national party. Although Hindu nationalist may be, strictly, a more
accurate description of its fundamental ideology than centre-right, in government it has
tended to put to one side its socio-political agenda in favour of largely neo-liberal economic
policies, consistent with Mr Modis governance of Gujarat and the platform on which he is
leading the partys 2014 election campaign.
The United Progressive Alliance (UPA)
The INC-led UPA was formed after the 2004 general election as Congress looked to form
a majority coalition after its surprise election victory. It is currently chaired by the INC
president, Sonia Gandhi. Although the INC itself is generally considered to be centre-
left/modern liberal, its partners in the UPA have tended to be left-of-centre.
For the duration of the 2004-2009 parliament, the UPA governed as a minority coalition but
with support from various other parties/blocks from outside the formal coalition, thereby
sustaining a Lok Sabha majority in principle at least. In the 2009 general election, the UPA
won a 262-seat plurality and was therefore able, initially at least, to pull together a solid
Lok Sabha majority.
Going into the 2014 election, in addition to the INC (206 seats) the UPA includes the
following parties holding seats in the Lok Sabha: the All India United Democratic Front (1),
the Indian Union Muslim League (3), the Kerala Congress (Mani) (1), the National
Conference (3), the Nationalist Congress Party (9), Rashtriya Lok Dal (5) and the Sikkim
Democratic Front (1). Additionally, it has had support from outside the formal coalition from
the Bahujan Samaj Party (21 seats), Rashtriya Janata Dal (3) and the Samajwadi Party
(22).
32

The roots of the INC itself go back to 1885. In the decades which followed, it was a major
force in the independence movement. Since independence in 1947 it has remained the
dominant party in Indian politics (and the only truly national party), heading the central
government for nearly 50 years. Throughout this period its leadership has been dominated
by the Nehru-Gandhi family. Originally socialist in its leanings, since the early 1990s the
INC has pursued more economically liberal policies (largely under the guidance of former
finance minister and outgoing Prime Minister Manmohan Singh), albeit tempered by the
Sarvodaya principle of inclusive development through support for the economically and
socially under-privileged.

30
By our count, there are at least another 21 parties which have been within the NDA fold in the past (two of which
have since merged with the BJP), giving some indication of the fluidity of party alliances in India.
31
See, eg, India elections: old men and dynasties vie for power by Amy Kazmin, Financial Times, 21 March 2014.
32
As with the NDA, the number of parties which have been associated with the UPA in the past but which are not
(formally) today runs into double-digits.

42
Recent Asia Special Reports

Date Report Title
25-Mar-14 Korea: Housing recovery set to accelerate
18-Mar-14 Indonesia's changing of the guard
14-Mar-14 Emerging markets politics: Crunch time
5-Feb-14 Asia's alive in the bitter sea
21-Jan-14 Thailand: No easy way out
6-Dec-13 Unlocking the Renminbi trend
26-Nov-13 2014 outlook: Growing divergences
18-Oct-13 Malaysia: At a fiscal crossroads
24-Sep-13 China's heavy LGFV debt burden
6-Sep-13 Asia's wake-up call
30-Aug-13 India and Indonesia: External funding gaps and policy responses
23-Jul-13 If China sneezes
19-Jul-13 India: Turbulent times ahead
28-Jun-13 Asia's rising risk premium
17-Jun-13 South Korea's deflation fears are overdone
19-Apr-13 Lower commodity prices a boon for Asia
15-Mar-13 China: Rising risks of financial crisis
6-Mar-13 Southeast Asia: Different strokes
28-Nov-12 2013 Outlook: Asia's overheating risks
14-Nov-12 South Korea: An Economic Democracy
25-Oct-12 India reforms (Part I): A long way to go
11-Oct-12 Introducing NESII The Nomura Economic Surprise Index for India
24-Sep-12 Thailand: New growth engines
14-Sep-12 China primed to surprise on the upside
5-Sep-12 Better hedges for a China hard landing
3-Sep-12 India's chronic balance of payments
7-Aug-12 Asia's inflation wildcard
2-Aug-12 Indonesia: Policy swings
31-Jul-12 India: A poor monsoon and its impact (Q&A)
9-Jul-12 South Korea: Prolonged low growth, inflation and rates through 2013
31-May-12 Pan-Asia: Inventory cycle threatens a slow recovery
29-May-12 China's peaking FX reserves
2-May-12 India: Make or break
23-Apr-12 The China compass
16-Apr-12 Korea: Uncomfortable trade-off
11-Apr-12 India: Four cyclical tailwinds to watch
27-Mar-12 Capital account liberalisation in China
9-Mar-12 India budget preview: Fiscal cheer
1-Mar-12 Asia: What if oil prices keep rising?
23-Feb-12 Philippines Fiscal space to maneuver
16-Jan-12 Decoding Indias stubbornly high inflation

43
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