The chastening defeat for the BJP in the Delhi Union Territory election has been viewed by some as a backlash against its recent policies including the passage of controversial Citizenship Amendment Act. But we doubt that the election result will cause the BJP to dial back its populist rhetoric. While that shouldn’t threaten the cyclical recovery in growth we expect this year, it could harm long-term prospects.
BJP policy shift unlikely after Delhi loss
The Election Commission confirmed this week that the local Aam Aadmi Party (AAP) stormed to victory in the Delhi Union Territory election, winning almost 90% of the available seats. (See Chart 1.) Prime Minister Modi’s BJP came a distant second.
Chart 1: Delhi Election Result (No. of Assembly Seats)
Source: Election Commission
The result has been viewed by some as a backlash against recent BJP policies, most notably the passage of the controversial Citizenship Amendment Act which led to large-scale protests in the capital. (See here.) Some commentators have even suggested the result could trigger a reversal of the BJP’s shift towards more nationalist policymaking.
But we think this is unlikely. For a start, the result does little to harm the BJP’s efforts to gain a majority in the Rajya Sabha (upper house of parliament), given that Delhi only accounts for three out of 245 seats. (See here for a primer on India’s state elections.)
More broadly, Delhi lies outside traditional BJP strongholds which tend to be in rural, predominantly Hindu areas. As such, it is not a particularly good bellwether of BJP support. Indeed, the BJP has a poor recent track record there in local elections: it won even fewer seats during in the previous vote in 2015.
And for what it’s worth, the latest “Mood of the Nation” Survey conducted by India Today in mid-January indicates that if another national election were held now, the BJP would still retain its majority in the Lok Sabha, albeit with a slimmer margin than it currently has. (See Chart 2.)
Chart 2: Lok Sabha Composition (No. of Seats)
Source: India Today
Given all of this, we doubt that Delhi election result will cause the BJP to dial back its populist rhetoric. A government focused on populist measures shouldn’t pose a threat to the cyclical recovery in economic growth that we are forecasting this year. (See here.) But there remains a risk that attention to economic policy slips and foreign investor sentiment sours. Either development would harm long-run prospects.
The week ahead
We are forecasting a small rise in wholesale price inflation in January (data due later today). That would be in line with the further pick up in January’s consumer price inflation reported earlier this week (see here), and reinforce our view that further rate cuts are unlikely.
January’s trade data are also likely to be released today. We are pencilling in a narrowing in the monthly deficit following the recent sharp fall in global oil prices.
More broadly, the global focus next week will remain on the coronavirus. Our dedicated webpage includes daily updates tracking the spread of the coronavirus and the economic impact on China and the rest of the world. Readers can find it here.
Wholesale Prices (Jan.) Fri. 14th Feb.
Wholesale Prices (y/y)
Likely increase in WPI inflation
Headline WPI inflation, which is less important to policymakers than the CPI measure, jumped from 0.6% y/y in November to 2.6% y/y in December. (See Chart 3.) We are forecasting a slight further increase in January, to 2.8%.
For a start, although the recent fall in global oil prices should weigh on fuel inflation, we think that food inflation will have risen slightly in part due to the recent increase in milk prices.
In addition, non-food manufactured products inflation – our proxy measure for core WPI – rose from -0.8% in November to -0.3% in December. We suspect that it will have edged up a little more last month, but a likely economic recovery this year on the back of policy loosening should soon result in stronger underlying price pressures.
Chart 3: Wholesale Prices (% y/y)
Sources: CEIC, Capital Economics
Economic Diary & Forecasts
Upcoming Events and Data Releases
Wholesale Prices (Jan.)
Also expected during this period:
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Trade Balance (Jan., USD)
14th – 17th
Exports (Jan., USD)
14th – 17th
Imports (Jan., USD)
*m/m(y/y) unless otherwise stated
Sources: Bloomberg, Capital Economics
Main Economic & Market Forecasts
% y/y unless stated
Current Account (4Q Sum, % of GDP)
Repo Rate† %
Reverse Repo Rate† %
Cash Reserve Ratio† %
10-Yr Government Bond Yield† %
Sources: Bloomberg, CEIC, Capital Economics *Q3; **January; †End of period
Shilan Shah, Senior India Economist, +65 6595 1511, firstname.lastname@example.org