On December 4th 2013, Delhi - India's smallest yet most visible state shall undergo elections for it's state assembly. The ruling Congress party is sweating it out due to unprecedented public support for a change after 14 years of rule.
The game has been turned on it's head by a new entrant - the 'Aam Aadmi Party' or literally the 'Common Man's Party' which aims to root out corruption and inefficiencies in the system. While an anti-corruption plan by itself cannot be a development plan, the AAP seems to have garnered massive support due to the widespread and unholy nexus of politics, business and crime.
Now for the part which makes it relevant for us investors. The macro-economic significance of these elections (as well as the 2014 nationwide general assembly elections) is enormous.
There are various scenarios possible -
1. If the incumbent Congress party retains power in Delhi, then it would be a clear stamp that the public does not think that corruption and politico-criminal nexus are burning issues. The politico-business nexus shall gain more power and we shall see increased favoritism towards large corporations (e.g. the Kingfisher Airlines debt and bankruptcy saga). A clean victory for the Congress would favor Reliance Industries and other large infra stocks. The India Earnings Fund (NYSEARCA:EPI) would likely benefit from this. [Probability= unlikely]
2. AAP wins 10-15 out of the 70 constituencies in Delhi, with the rest being split between the Bhartiya Janata Party (BJP) and the Congress Party - the likelihood of a fragmented government increases, but ultimately whichever coalition comes to power will recognize that the socio-economic climate needs to change. This will actually lead to a more stabilized approach towards growth, away from the debt-fuelled crazy growth that we have witnessed at Reliance group, Adani group etc. [Probability= moderate].
The economic environment is generally shaky with coalition governments, so such a verdict would certainly be a dampener on the markets. Expect broad indices like the S&P India Nifty Fifty Index (NASDAQ:INDY) to drop on the news of a fragmented result. A fully formed coalition government will reverse this trend and lead to recovery.
3. AAP wins a majority of the seats and forms the state government. The AAP has not spoken much about legal reforms or economic agenda, but they have time and again stressed on a transparent government. The markets would still rally in this scenario as it would definitely be a departure from the current regime. Large-cap Indian favorites like TTM, INFY, IBN would rally in light of a government which would be more transparent than the current. [Probability = unlikely]
Among ETFs - the Poweshares India ETF (NYSEARCA:PIN) is heavily weighted towards mega caps like Reliance Industries, ONGC, Hindustan Unlivever which should do well in scenarios #2 or #3.
Overall the elections this week shall decide long term what the Indian voters feel is important. Are they looking for a transparent government with stable growth or want to continue the current corrupt, subsidy-prone model which leads to shaky, inefficient and debt fuelled growth that India has witnessed over the past few years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.