6 March 2019

Economics
India’s pivotal elections India

10 frequently asked questions

 India’s national elections are due in May Pranjul Bhandari

Chief Economist, India
 We discuss the possible impact that economic/security issues, HSBC Securities and Capital Markets (India) Private Limited
pranjul.bhandari@hsbc.co.in
presidential overtones, states, and coalitions could have on +91 22 2268 1841

the outcome Aayushi Chaudhary

Economist
HSBC Securities and Capital Markets (India) Private Limited
 We discuss possible scenarios and their impact on reforms aayushi.chaudhary@hsbc.co.in
+91 22 2268 5543
We answer 10 frequently asked questions on India’s national elections. Deep Nagpal
Associate
# 1: What could impact the 2019 election result vis-à-vis 2014? The pro-BJP Bangalore
verdict in 2014 was a result of several factors. The national issues that
dominate the next few weeks, and whether or not young voters turn up again,
in our view, will shape the 2019 result.

# 2: Will security issues overpower economic ones? Given recent

developments, national security issues could be more important than economic
issues in the final run-up to the elections.

# 3: Will India choose its Prime Minister, or its ruling party? While India is a
parliamentary democracy, mainstream and social media trends indicate that the
upcoming elections will have presidential overtones.

# 4: Will a few states determine the next government? The 2019 result,
particularly for the BJP, may not be as concentrated in a few states as in 2014,
but the state of Uttar Pradesh (UP) could still play a crucial role.

# 5: How much will data and ‘digital’ impact the elections? The elections are likely to
be multimedia heavy, given India’s social media footprint has grown manifold since
2014. WhatsApp has emerged as the primary platform for digital communication.

# 6: How united is the opposition? A wave of new coalitions suggests that the non-
BJP parties are less fragmented today, making it a tough contest for the incumbent.
# 7: What are the opinion polls saying? Until October 2018, most polls suggested
a BJP+ win. Since then, they are pointing to a hung parliament. However, these
trends could change again in polls conducted after the recent flare-up of India-
Pakistan tensions.

# 8: What are the possible outcomes? Three distinct outcomes are likely: a BJP-led
coalition, a Congress Party-led one, and a “Third Front” (i.e., a cluster of regional
parties)-led one (details in the report).

# 9: Do “Third Front” governments halt the reform process? Coalition governments

have been associated with instability, yet their reform footprint can be strong.

# 10: What will be the likely direction of reforms? Since the country liberalised in 1991,
the direction of reforms has been broadly unchanged, irrespective of the political
party in power. However, the pace of reforms can differ across governments.

Disclosures & Disclaimer Issuer of report: HSBC Securities and Capital

Markets (India) Private Limited
This report must be read with the disclosures and the analyst certifications in
the Disclosure appendix, and with the Disclaimer, which forms part of it. View HSBC Global Research at:
https://www.research.hsbc.com
 Economics ● India
6 March 2019

India’s all-important national elections are expected to happen over April and May1. In this
report, we aim to answer 10 key questions that investors are asking.

Question 1: What determined the 2014 result? In what way will

2019 be different?

The 2014 national elections were a decisive win for the BJP (Bharatiya Janata Party). It won 282
of the 543 seats in the Lower House of parliament. For the first time in 67 years of independent
India, a non-Congress Party won a simple majority on its own. These were a few striking features
of the elections:
 Voter turnout – The voter turnout of 66.4% was the highest in India’s history and a full
eight percentage points higher than in the 2004 and 2009 general elections.
 Young voters – The young voter turnout (18-25 years) was 2ppt higher than the national
average (versus about 4ppt lower than the national average previously; see Chart 1), and
the BJP benefitted most from these young voters (see Chart 2).
 Concentration of votes – 85% of the BJP’s seats were won in 10 states, mostly in north-
central and western India.
 Fragmented opposition – The BJP won c52% of the seats with just 31.3% of the votes in
2014. This highlights the vagaries of the “first-past-the-post” system, and the fragmentation
of the non-BJP votes. In particular, the Congress Party won 19.5% of the votes but only
8.1% of the seats.
 Rural versus urban – Rural and urban India voted similarly in 2014, giving a larger pie of
their votes to the BJP than to the Congress Party (see Chart 3). We believe that the lines
separating rural and urban voting behaviour have blurred, thanks to technology and more
access to information.

In our view, this pro-BJP wave was a result of: (1) an anti-incumbency voter sentiment after 10
years of rule by the Congress Party, (2) a slowing economy, (3) a contest with presidential
overtones, with Mr Modi as a compelling candidate, and (4) a fragmentation of the non-BJP votes.

Will this result be repeated in 2019? One can argue that of the four factors discussed above,
some are reversing. It is the BJP that faces (some) anti-incumbency sentiment. Whether or not
the youth will show up to vote with as much enthusiasm as before, and vote for the BJP as they
did last time, cannot be ascertained. Growth in some pockets of the economy is slowing, though
not to worrisome levels, in our view. And the non-BJP votes may not be as fragmented as
before. There is a flurry of activity to form coalitions amongst the non-BJP parties.

And yet, presidential overtones persist. Prime Minister Modi’s popularity remains fairly high. The
issues that dominate the political narrative over the next few weeks, and whether the BJP is
able to mobilise young voters (like it did in 2014), in our view, will determine the result of the
2019 elections. We now delve into these issues in more detail.

Answer: The pro-BJP verdict in 2014 was a result of several factors. The national issues that
dominate the next few weeks, and whether or not young voters turn up again, in our view, will
shape the 2019 result.

______________________________________
1
In this report, we use the terms “general” and “national” elections interchangeably.

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6 March 2019

Chart 1: In 2014, young voter turnout was Chart 2: The BJP benefitted the most from
2ppt higher than the national average the young voter turnout (18-25 years)
% Voters turnout 35
% Vote Share
70 (Youth voters) 34
60 68 66
60 30 28
50 57 58 58
54 27 27
52
40 26
25
30
23
20 20 19
20
10
0 15
1999 2004 2009 2014 1999 2004 2009 2014
Congress BJP
Young voters (18-25 years) All India
Source: Centre for the Study of Developing Societies (CSDS), HSBC Source: Centre for the Study of Developing Societies (CSDS), HSBC

Chart 3: Rural and urban India voted similarly in 2014

%
Rural and urban voter share
40
35
30 34 35
25 28
27
20
20 20 21
15
17
10
5
0
Rural Urban Rural Urban
2009 2014
Congress BJP
Source: Centre for the Study of Developing Societies (CSDS), HSBC

Question 2: Will security issues overpower economic ones?

Until a few months ago, it was expected that rural incomes, the health of India’s small
businesses, and the outlook on jobs could be the key economic issues that would impact voting
behaviour. The government had perhaps believed the same. It announced a new direct cash
transfer scheme in the February budget targeted at small landed farmers (see India’s election
year budget: A vote for rural income and the middle class, 1 February, 2019). It also announced
a string of measures to help the fortunes of small businesses.

Since then, an attack in India (on 14 February) and the subsequent use of force by India and
Pakistan against each other has fanned nationalist sentiment.

Given the situation is fluid and the salience of the national security issue just weeks before the
elections, we think national security/nationalism could trump economic issues in impacting voter
behaviour in the upcoming elections.

Answer: Given recent developments, national security issues could be more important than
economic issues in the final run-up to the elections.

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6 March 2019

Chart 4: Person over party in India’s Chart 5: The popularity difference between
politics the two main national party leaders has
narrowed… but the results remain fluid
mn Popularity on social media % Who is best suited to be the next
50 80 Prime Minister of India?
40 60

30
40
20
20
10
0
0
Narendra BJP Rahul Gandhi INC
Modi Narendra Modi Rahul Gandhi
Twitter followers
Source: Twitter, HSBC. Data as of 26 February 2019. Source: India Today Mood of the Nation Poll, HSBC

Question 3: Will India choose its Prime Minister, or its ruling party?

While India follows a Westminster-style parliamentary democracy, we expect the upcoming

elections to have presidential overtones and to a large extent be personality driven. Consider
the evidence – Prime Minister Modi has a larger following on social media platforms than his
party, the BJP. Likewise, Rahul Gandhi, the leader of the main opposition party, the Congress
Party, also has a larger following on social media than his party (see Chart 4).

The importance of the personality ‘quotient’ was also visible in the state elections in 2018, when
both national leaders invested significant political capital in local polls.

Prime Minister Modi’s popularity ratings remain high. According to The Times of India Opinion
Poll of 2019, 83% say that a Modi-led government is the most likely outcome in the 2019
elections. The comparable numbers for Modi’s popularity in the 2018 and 2017 polls are 72%
and 79%, respectively. According to The India Today Mood of the Nation poll, his popularity
rating is 46% versus 34% for Mr Rahul Gandhi.

Having said that, the difference between the two leaders has been narrowing (see Chart 5).
However, then again, these polls were conducted before the recent flare-up of India-Pakistan
tensions, the rural cash transfer scheme announced in the budget, and the announcement of some
new caste-based reservations. These can potentially impact popularity ratings/voter behaviour.

Answer: While India is a parliamentary democracy, mainstream and social media trends
indicate that the upcoming elections will likely have presidential overtones.

Question 4: Will a few states determine the next government?

The BJP’s historic parliamentary majority – the first in 30 years – was concentrated in states
lying in the north-central and western belt (sometimes referred to as the Hindi (speaking)
heartland). 10 of these states accounted for 85% of the seats the BJP won.

Of the 10 states, India’s largest state, UP, stands out most starkly. The BJP won 71 of the 80
seats in UP. One of every four seats it won nationally was from UP.

Will the BJP’s performance be as concentrated in 2019?

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6 March 2019

Perhaps not as much. It is not easy to replicate the result of the 2014 elections, especially with the
BJP facing five years of anti-incumbency. It will not be surprising, in our view, if the BJP wins fewer
seats in the north-central and western states than it did in 2014.

However, all is not lost for the BJP. There could be offsetting factors. The BJP has made
significant inroads into some newer states since 2014. These are particularly the eastern and
north-eastern states, such as Assam, Odisha, and West Bengal.

The BJP could well make up some of the potential north-central belt seat losses in the eastern
states. This suggests that the 2019 result may not be as regionally concentrated as that in 2014.

Having said that, UP is likely to continue wearing the ‘king-maker crown’, given its sheer size
(the largest state with 15% of the Lower House seats). It is gearing up to be a three-way contest
in UP – between the alliance of the two main regional parties (the Samajwadi Party and the
Bahujan Samaj Party2), the BJP, and the Congress Party. Any outsized victory/defeat of a party
in UP will in most likelihood impact its national-level fortunes.

Answer: The 2019 result, particularly for the BJP, may not be as concentrated in a few states
as that in 2014, but the state of Uttar Pradesh could still play a crucial role.

Question 5: How much will data and ‘digital’ impact the elections?

The use of social media platforms has become an important conduit to engage with India’s
middle class and youth voters. India’s 2019 elections are likely to be more multimedia heavy
than the 2014 elections. The number of internet subscribers has doubled to c490m and the
number of smartphone users has tripled to 380m since 2014. The number of monthly active
WhatsApp users has growth five times to 200m. The number of Twitter and Facebook users has
also doubled since 2014 to 34m and 314m, respectively.

In the past, mainstream media were the key messengers to the masses. However, now the
internet and social media platforms offer more direct communication, including micro campaigns
on WhatsApp. The latter has emerged as the primary platform for digital communication in India
and will likely play a major role in the elections.

The two main national parties (the BJP and the Congress Party) and some regional political
parties have set up sophisticated data analytics and digital communications units to better
understand their voter bases at the local level and to tailor their election campaigns.

While digital will be important, there is no replacement for intense door-to-door campaigning.
The BJP, in particular, has a sophisticated ‘machinery’ on the ground where it aims to reach
“every voter” at least four times during the campaign.

Answer: The elections are likely to be multimedia heavy, given India’s social media footprint
has grown manifold since 2014. Micro campaigns on WhatsApp have emerged as the primary
platform for digital communication.

______________________________________
2 It is worth noting that these two regional parties have fought fiercely for several decades for the dominance of UP, but
joined hand in 2018 to fight the growing power of the BJP.

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Question 6: How united is the opposition?

As highlighted above, the BJP benefitted from a fragmented opposition in 2014. There have
been some changes since.

There seems to be a flurry of activity among the opposition parties to form coalitions, ever since
the Karnataka state elections in May 2018, when a coalition led by a regional party and
supported by the Congress Party formed the government, defeating the BJP.

There has been plenty of rhetoric around opposition unity in the last few months; however, how
effectively this translates into meaningful seat-sharing arrangements against the BJP across the
country is still unknown. While some call these the “coalition of convenience” with an alleged sole
purpose of defeating Prime Minister Modi, others defend the coalition talks on ideological grounds.

On the other side, the BJP too has also been repairing old alliances and forging new ones. It
has sealed alliances with regional parties in Bihar, Maharashtra, Tamil Nadu, and Punjab.

It is worth noting here that it is common for regional parties to shift loyalties after polls in bargain
for gains for their states; as such, the direction of the impact coalition politics will eventually
have in the formation of the government is uncertain.

Answer: A wave of new coalitions suggests that the non-BJP parties are less fragmented
today, making it a tough contest for the incumbent.

Question 7: What are the opinion polls saying?

India’s opinion polls have given varying indications in recent months, and the message is likely
to remain fluid. Until October 2018, most polls suggested a BJP+ win. Since then, they are
pointing to a hung parliament, indicating the rise of the “Third Front” and “coalition politics” (see
Chart 6 and Table 1).

Having said that, these trends could change again over the next few weeks. No major poll has
been conducted after the recent flare-up of India-Pakistan tensions, the rural cash transfer
scheme, and the new caste-based reservations.

Answer: Until October 2018, most polls suggested a BJP+ win. Since then, they are pointing
to a hung parliament. However, these trends could change again in polls conducted after the
recent flare-up of India-Pakistan tensions.

Chart 6: Poll of polls suggest no clear majority… but this could change in subsequent polls
Lok sabha seats Poll of polls
543
Seats needed
453
for
362 parliamentary
majority: 272
272
181 Recent polls
indicate an
91 absence of clear
0 majority

BJP + INC +
Axis Title Others
Note: 1. No poll has been conducted after the recent flare-up of India-Pakistan tensions. 2. If there are two or more polls in a particular month, we take the average of the polls
to get a single observation for that month. 3. BJP + refers to the Bharatiya Janata Party and its allies, and INC + refers to the Indian National Congress Party and its allies.
Source: Media Reports, HSBC

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6 March 2019

Question 8: What are the possible outcomes?

Considering all that has been discussed so far, we outline four scenarios for the election result,
with some estimates of seat share.

1. A BJP-led coalition: This could come in two variants.

 With a strong reliance on alliance partners: In this scenario, the BJP could emerge as the
single largest party, securing c180-220 of the 543 seats, but it would need to rely on multiple
alliance partners (including post-poll alliances) to reach the majority mark of 272 seats.

 With a dominant BJP presence: In this scenario, the BJP could emerge, once again,
as the dominant party, securing over 220 seats. The BJP will have the ability to reach
the majority mark with the support from a few allies under the leadership of PM Modi.

2. A Congress Party-led coalition: In this scenario, the Congress Party with over 140 seats
could lead an alliance with the support of multiple regional parties. Rahul Gandhi could be a
likely PM candidate in this scenario.

3. A “Third Front” coalition: This scenario could emerge if both the BJP and the Congress
Party do not do as well as expected. In this scenario, a cluster of regional parties would
form the government, with potentially the Congress Party providing outside support. There
could be some differences over the choice of PM candidate. The stability and longevity of
the government will need to be watched out.

Answer: Three distinct outcomes are likely – a BJP-led coalition, a Congress Party-led
one, and a “Third Front” (a cluster of regional parties)-led one.

Question 9: Do “Third Front” governments halt the reform process?

Given a “Third Front” is amongst the possible scenarios, investors often ask what it would imply
for reforms.

Coalitions in India are often perceived to be associated with instability, especially if the coalition
is not led by one of the main national parties. This is because in India’s political history, a “Third
Front” government has never been able to complete a full five-year term.

However, the track record of “Third Front” governments on reforms has not always been
‘dismal’. For instance, the 1996 “Third Front” government presented what was seen as a “dream
budget”, taking forward many economic reforms, including on individual and corporate tax rates.

Moreover, one could argue that the onus on reforms has since shifted to the states, and many
regional parties have come out as reformist and business-friendly in intent and action. In recent
years, states have led many successful reforms across rural incomes (e.g., the direct cash
transfer schemes in Telangana and Orissa), education (innovative curriculums in Delhi and
Andhra Pradesh), land acquisition (innovative techniques to acquire land for the new city of
Amravati in Andhra Pradesh), etc.

Global evidence suggests that coalition governments may be a ‘mixed bag’. A weak coalition
can slow the pace of reforms and even stoke instability. A strong coalition, on the other hand,
can prevent policy missteps.

Answer: Coalition governments have been associated with instability, yet their reform
footprint can be strong.

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6 March 2019

Question 10: What will be the likely direction of reforms?

It is worth noting that some of the key reforms that the current BJP government championed,
e.g., the Goods and Services Tax (GST) and the use of Unique Identity Numbers for service
delivery, were initiated during the Congress Party government. In fact, although the Congress
Party had originally championed certain welfare schemes (for instance, the employment
guarantee scheme), the BJP too has also contributed to the agenda since (for instance, direct
cash transfers to rural India).

While the pace of reform rollout may have been different, we see no drastic change or reversal from
the approach of the previous government. In fact, we believe the direction of reforms has been broadly
unchanged ever since the country liberalised in 1991, irrespective of the political party in power.

All told, we expect the reform agenda to continue, although at a varying pace of rollout,
depending on the might of the government in the two houses of parliament. The slight exception
here could be an unstable “Third Front” government. However, here too, we do not think the
direction of reforms will reverse; rather, the pace could get impacted.

Answer: Since the country liberalised in 1991, the direction of reforms has been broadly
unchanged, irrespective of the political party in power. However, the pace of reforms can
differ across governments.

Appendix

Table 1: Summary of different national elections opinion polls undertaken since 2015
Date published Polling agency BJP + INC + Others Outcome
Feb 2019 VDP Associates 242 148 153 No clear majority
Jan 2019 Times Now-VMR 252 147 144 No clear majority
Jan 2019 Deccan Herald 160-175 180-200 160-180 No clear majority
Jan 2019 ABP News - Cvoter 233 167 143 No clear majority
Jan 2019 India Today - Karvy 237 166 140 No clear majority
Jan 2019 VDP Associates 225 167 150 No clear majority
Dec 2018 India Today 257 146 140 No clear majority
Dec 2018 India TV - CNX 281 124 138 BJP +
Oct 2018 ABP News 276 112 155 BJP +
May 2018 ABP News - CSDS 274 164 105 BJP +
Jan 2018 India Today 309 102 132 BJP +
Aug 2017 India Today 349 75 119 BJP +
Aug 2016 India Today 304 94 145 BJP +
Feb 2016 India Today 286 110 147 BJP +
Aug 2015 India Today 288 81 174 BJP +
Source: Media reports, HSBC. Note: BJP + refers to the Bharatiya Janata Party and its allies. INC + refers to the Indian National Congress Party and its allies.

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Key reports

India’s lack of inflation: Exhibiting divergence in the convergence era, 18 February 2019

India’s cash in circulation: And its impact on the RBI’s OMO purchases, 11 February 2019

India’s election year budget: A vote for rural income and the middle class, 1 February 2019

2019: India’s year of choices: With a “Bandersnatch” ending, 18 January 2019

India: The fog of fiscal finances: Farmer income, RBI capital, and fiscal rules, 10 January 2019

India RBI Watch: A rural-urban inflation divide, 3 December 2018

India’s ‘semi-final’ polls: What state elections might (not) say about the national one,
28 November 2018

Four burning questions: Everything you need to know about India’s economy,
15 November 2018

India’s BoP burden: Will the rupee and world growth ease it?, 15 October 2018

A season of counter narratives: India’s policy options, 13 September 2018

India: The shape of growth: And the role of each sector, 27 August 2018

India’s unlikely trinity: Farm, formalisation and cash, 22 June 2018

India: Surviving reversals: The global and local case for rate hikes, 10 May 2018

When rules and discretion collide: A study of India’s state and centre finances, 23 April 2018

India and the world: Stronger roots, greater reach, 12 September 2017

India’s rural distress puzzle: Where from, where to?, 10 July 2017

India’s investment challenges: What can go right?, 16 May 2017

India’s external sector bounty: How much more?, 3 May 2017

Churning the ocean: Finding the cure for ailing exports, 17 October 2016

More jobs per click: The employment potential of e-commerce, 26 July 2016

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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s)
whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering
analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or
issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other
views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect
their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Pranjul Bhandari and Aayushi Chaudhary

Important disclosures
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Additional disclosures

1 This report is dated as at 06 March 2019.

2 All market data included in this report are dated as at close 04 March 2019, unless a different date and/or a specific time of
day is indicated in the report.

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Private Limited. MCI (P) 065/01/2019, MCI (P) 008/02/2019

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