At stake, in Bihar

At the core of it, in our view, is the human frailty that Nobel laureate Daniel Kahneman points out: What appears most often is considered the most important. In particular, those in markets know intuitively the legendary Ben Graham’s phrase: In the short run, the market is a voting machine, but in the long run, it is a weighing machine. This much-quoted phrase is generally used to emphasise that long-term investors must focus on economic fundamentals. But, in the current context, the emphasis is on short-term changes and the voting-machine analogy — if the whole market is focused on an event, however unimportant it is fundamentally, everyone is forced to track it, even if the impact may be shortlived.

In what could be called the “tyranny of the headline” at a time of information overload, there is little room for a nuanced interpretation of electoral verdicts, particularly for those outside India. Results are likely to be extrapolated onto 2019 and beyond; such an interpretation would be incorrect, but is still likely and may affect foreign investor sentiment. What matters more, however, is their behaviour, which is driven by the underlying economic momentum, mostly unrelated to the results of these elections.

But is there something for the weighing-machine part of the market as well? That is, could these results impact the Indian economy’s prospects? In our view they should, on three fronts.

The first is on Bihar itself, though over several years. Continued growth in Bihar over time would also impact the cost of unskilled labour all over India, as outward migration from Bihar slows. Given Bihar’s large population share, it could also be a source of demand growth for most companies. For that, Bihar would benefit from a stable, growth-focused government with a full-term chief minister.

Will that happen? Most surveys and commentaries portray a confused picture. For good reason: Elections in Bihar are hard for psephologists, not least because many voters do not respond honestly to surveys. Some are too scared, and others, not comfortable. We are in the early stages of the weakening of caste allegiances, and openly talking about not voting on caste lines is not easy. But a clear verdict seems likely — given the quasi-presidential nature of the contest, even if vote shares are close, the verdict in seats should be decisive.

The second impact is on legislative prospects. As most of us realise with experience, criticising the popular boy/ girl in class is a self-defeating exercise. The opposition politician is, therefore, forever judging the popularity of the ruling dispensation in order to decide whether to support or oppose bills. On most bills, there isn’t much ideological difference between parties, and many bills lack an emotive connect with the voter — for instance, the GST bill, which is far too technical to make for a political issue.

Given the lack of reliable high-frequency indicators of government popularity, the Opposition seems to take its cues from assembly elections. This is inaccurate and one might say inappropriate, as assembly elections are contested mostly on local issues, and the availability of alternatives is an important factor for voters. Bihar is no different. But the Opposition has nothing better to work with — note the disproportionate impact of the Delhi elections on Opposition behaviour.

Thus, if the NDA loses Bihar heavily, the Opposition appears likely to become more intransigent. A big NDA victory, on the other hand, would be a signal that the government retains popular support, and that stalling its work may be counterproductive. This
may help lift the legislative logjam in the Rajya Sabha.

The third impact is on the broader political agenda in the country. Just as investors are mainly motivated by money, politicians are mainly motivated by votes; arguably, their key aim in any democracy is to figure out what the majority wants, promise it and, once they win, try to deliver it. While many view the 2014 elections as the cause of expected change, in our view, they were a much stronger symptom of the change already underway in India. It was a strong signal to politicians that voters wanted jobs, electricity and roads more than caste or religious appeasement.

What has followed is heartening competition among states to attract investment, in the process, easing labour rules, electrifying households, building roads, providing land and simplifying procedures to set up new businesses. Who expected to see billboards in Mumbai advertising Uttar Pradesh as an investment destination, or to hear FM radio ads on how easy it is to set up a business in Punjab?

The Bihar elections were initially shaping up as a battle of ideologies — a growth and development party on the one hand, and a caste-based grand alliance on the other, even if the latter was being led by a leader with strong development credentials. We believed that an NDA victory would be a strong blow against giving primacy to caste calculations in electoral strategy, and an NDA loss would signal that the vote-value of development was declining again. These interpretations likely still apply, but the message is now less clear: While early rhetoric seemed to be a jostling to establish who was best qualified to take Bihar to prosperity, in recent weeks, both sides have shifted the discourse to caste/ religious arithmetic.

To conclude, while we believe the elections are likely to have meaningful long-term implications for the person from Bihar as well as the national economy, the impact on stockmarkets is likely to be transitory.

The writer is India strategist, Credit Suisse