Modi factor: Government may unleash more populist measures

The Narendra Modi factor may force the government to push more populist measures in the months leading up to general elections due in May next year, analysts say.

"With everyone being a lot more bullish on Modi's prospects these days I'm sure the government will want to try and throw some goodies into the market to change that situation so it might become more populist as well, as you get towards the end of the year," Andrew Holland, chief executive officer, Investments, Ambit Capital said. (Watch: Video)

Last month, the Rs 1.25 lakh crore-Food Security Bill was passed by Parliament, which many analysts said was done with an eye on the upcoming national elections due in 2014.

The Food Security Bill, the world's biggest programme to fight hunger, is aimed at providing highly subsidised food to 67 per cent the country's population.

"It has been done with an eye on the polls. What I would have preferred is a focus on reforms, building infrastructure and clearing supply-side bottlenecks. That is the need of the hour in my view," Harsh Mariwala, chairman and managing director, Marico had said.

Analysts have questioned the Bill not only for its timing, but also because it might put severe strain on the government's finances. That's because the government is struggling with high fiscal deficit - for which it has been repeatedly warned by global ratings agencies. It's also facing a record current account deficit, which led to a sharp fall in the Indian rupee.

Also, the sharp slowdown in India' economy means, there's little incentive for foreign investors to put money into the economy.

Mr Holland said the window to push reforms to lift the country's economy is rather narrow given that, assembly polls in New Delhi are due in October and the general election next year.

"October is a key to keep investors engaged and for them to feel confident that they can not only ride through any tapering by the Fed but the local elections and then the full-blown elections next year," Mr Holland said.

And with the rupee and stock markets recovering sharply, partly because of the US Fed's surprise decision to delay tapering of stimulus, there's little chance that the government will push through fiscally prudent, but politically contentious decisions.

"I'm feeling that the market short-term will be under pressure unless we see some policy changes by the government, given that we haven't had a diesel price hike is quite worrying." Mr Holland said.

Analyst Christopher Wood last month wrote in his weekly column, "Greed & fear's view is that the worse the sense of crisis the better Modi's chance of winning."

He also said, "The Indian stock market's greatest hope is the emergence of Gujarat Chief Minister Narendra Modi as the BJP's prime ministerial candidate."

Mr Wood's 'Greed & fear' reviews global markets and economies and is widely followed by investment professionals and the media.