The biggest win, however, was for the Aam Aadmi Party (AAP) which was born only a year ago out of an anti-corruption movement. It shocked both the main parties by winning a close second place in Delhi with 28 seats. This is not far behind BJP's win of 32 seats. The AAP is led by a mild-mannered former civil servant, Arvind Kejriwal. His aim is to end the grip of the two largest parties, Congress and BJP, on Indian politics. And, in the process clean up the rotten elements of Indian politics. Kejriwal was fighting the current Congress Chief Minister, Mrs Sheila Dixit, in her own constituency. He won more votes than Mrs Dixit and Congress combined. The challenge ahead for the AAP is to grow the movement nationally in time for national elections. Even though it has 309 committees across 22 out of 28 states in India this is a tall task. Kejriwal promises transparent political funding in a country where funding for parties often comes from dubious sources. And where parties have offered populist policies in the past to secure votes. One internal survey ahead of the Delhi elections found about a third of the party's supporters wanting Modi as Prime Minister. If the AAP, at national elections, is able to continue its current success, it may become an important voice in any coalition. With its strong anti-corruption stance, it would mark an interesting phase in Indian coalition politics.

Could Modi, if elected Prime Minister at the general elections, be a "game changer" for the Indian economy and markets? Very possibly. In the short run, BJP's win is positive for the market. The SENSEX closed at another new all-time high today of 21, 327, and the Indian Rupee touched a four-month high. This marks an astonishing turnaround compared to June-August when India seemed trapped in its worst economic crisis since 1991. Foreign investors abandoned Indian markets. This led to steep falls in the stock markets and the Indian Rupee. So far in 2013 FIIs have invested $ 18.1 bn, the third highest ever in the 20 years they have been allowed to invest in Indian shares. Not bad, considering 2013's plethora of bad news.

 

David Fuller's view

Here is a link to the full report quoted above.  

Governance Is Everything, as this service has emphasised over the decades, not least for emerging markets.  The return of the BJP now that it is led by Narendra Modi, plus the rise of the AAP in little over a year, not to mention the ruling Congress Party’s decline, demonstrate the anger and frustration of Indians over corruption, inflation and slumping GDP growth in recent years.  The political turnaround after many years of apathy and resignation is nothing short of breathtaking. 

I think Congress is out of the running.  However, the BJP is very unlikely to win an overall majority of 273 seats so the key question will be: would Narendra Modi be able to form an effective coalition with Arvind Kejriwal of the AAP? 

I am certainly no expert on Indian politics.  However, speaking as one who has long been fascinated by India and its achievements, and as an investor in the country, I have been dismayed and exasperated by the increasing political corruption in recent years.  If that deterioration is about to be reversed, as seems likely since Modi has been very outspoken about corruption, the prospect of an economically savvy, anti-corruption government in India would attract huge overseas cash flows from businesses and also investors. 

If Modi and Kejriwal can get along, and at the risk of sounding naïve that should be theoretically possible, a BJP / AAP coalition might actually be a workable combination.  Kejriwal could focus mainly on reducing corruption throughout India, while Modi could modernise the economy generate a resurgence of GDP growth. 

They would also benefit from an exceptional Governor at the Reserve Bank of India, Raghuram Rajan.  Since his appointment he has reversed the Rupee’s slump and re-energised India’s stock market.  With the Rupee shown inversely versus the US Dollar (USD/INR), I believe Rajan hopes to hold the currency in the R62 to R60 range for at least the medium term.  Meanwhile, if the Sensex Index can hold above 20,000, India will be poised for an upside breakout next year, provided Wall Street does not experience too big a setback.