Mar 20, 2013, 08.45 PM IST | Source: CNBC-TV18

UPA crisis irks brokerages, trigger outlook change

With the DMK withdrawing support and the Samajwadi Party playing political hardball, the UPA's position is getting shakier. And in the financial markets, the tension can be cut with a knife.

Sajeet Manghat

Chief of Bureau, CNBC-TV18

With the DMK withdrawing support and the Samajwadi Party playing political hardball, the UPA's position is getting shakier. And in the financial markets, the tension can be cut with a knife. CNBC-TV18’s Sajeet Manghat and Ashmit Kumar report that brokerages, both foreign and domestic, are realigning their outlook for the political climate in the country.

For Prime Minister Manmohan Singh and UPA Chairperson Sonia Gandhi, the last few months have not been the best of times. And now, an already brittle governing alliance has turned positively fragile.

Karunanidhi's DMK has withdrawn support, leaving Mulayam Singh Yadav and his Samajwadi Party in the position of king-maker once again.

The "we're fine!" rhetoric from Congress leaders is also starting to sound feeble, and the financial markets, which are a bundle of nerves on a good day, are now queasy.

JPMorgan, for instance, advocates caution when it comes to the outlook for the Indian markets. It says “The financial markets are nervous. The fears are focused on the potential impact of the DMK's withdrawal on the Government's relative strength and its ability to execute on the reform agenda. Success herein is crucial given the muddled macro.”

Now most market players agree that political parties in India, save a few like the Trinamool Congress, will not be interested in an election immediately but a six-month advancement is not being ruled out.

As Kotak puts it: We find limited rationale for any player to press the move for early elections.

(1) Incumbent members are unlikely to cut short their tenure by 20 percent given uncertainty of their reelection;
(2) the ruling Congress party would like to expand the scope of the Direct Benefit Transfer schemes as much as it can for political gains, and would also like to avoid elections at present given high inflation and corruption charges;
(3) the primary opposition party, BJP, will be watching the upcoming Karnataka elections (due in April-May) to get a sense of voter momentum and is yet to finalize its leader; and
(4) several of the larger regional parties like the BSP in Uttar Pradesh and the DMK in Tamil Nadu have not done too well in the last elections in their states."

Some brokerages warn that political considerations may now force big-ticket reforms like FDI on to the back burner, while poll-friendly social schemes take centre stage. But others are not so certain.

Religare says: "Amidst rising macro-economic uncertainty and still significant risk on India's twin-deficit problem, the possibility of a potential sovereign downgrade has not completely mitigated. As such, we believe the Govt. would not delay its reform-push agenda especially so far ahead of the 2014 general elections."

Clearly, brokerages may differ in the degree of the UPA's problem, but they all agree that it is a fight for survival... and the bleeding that has started in the financial markets may not clot anytime soon.

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