Assembly elections in the southern state of Karnataka have produced a hung verdict with no party getting a clear majority. The Bharatiya Janata Party (BJP) has emerged as the single-largest party and will stake claim to form the government, but the state's ruling Congress and Janata Dal (Secular) are also attempting to stitch together a coalition and make a rival bid.
As things stand, it is unclear whether the BJP will come to power. But it's victory over the Congress-led regime marks a significant milestone on the road to next year's general elections in which Prime Minister Narendra Modi will seek a second term.
Political consequences
After a tougher-than-expected victory in Modi's home state of Gujarat late last year, the Karnataka result will give the BJP impetus ahead of three tough state elections later this year in Rajasthan, Madhya Pradesh and Chhattisgarh. The BJP is in power in all three states and faces the challenge of overcoming anti-incumbency. But the Karnataka result could well energise party cadres in those states.
Significantly, a BJP-led government in Karnataka would leave the Congress at the helm of only one major state - Punjab.
The result also re-establishes Modi as the BJP's tallest leader. The Congress appeared to have an edge during the Karnataka campaign until the top BJP leadership led by Modi began a blitzkrieg of sorts weeks before the vote and turned the tables.
Modi not only remains the BJP’s star campaigner but is also the only obvious prime ministerial candidate for 2019.
The general consensus among pollsters and political pundits going into the 2019 elections is that the BJP may not hit the majority mark of 272 in the Lok Sabha as it did in 2014, and may therefore have to depend on its allies to cobble together a majority.
But even if that happens, Modi’s political clout might ensure that he remains the prime minister.
Key economic challenges
The Karnataka verdict also strengthens Modi's hand when it comes to taking tough economic decisions that may not necessarily be politically advantageous.
In fact, foreign investors seem to have already factored in a Modi victory in 2019 according to a recent analysis by global investment bank UBS.
Emboldened by the Karnataka result, Modi and his government could go full steam ahead with more economic reforms rather than giving into populism during a pre-election year.
Among a host of challenges, rising global crude oil prices and a depreciating rupee in particular threaten to derail to government's fiscal math and it could miss its fiscal deficit target of 3.3% of GDP for the current financial year.
According to UBS, at current crude prices, India's current account deficit could touch 2.5% of the GDP.
Economic reforms
The government is reportedly in the process of preparing draft proposals on a direct tax code, which would overhaul the way companies and individuals are taxed in India.
The new tax law, which will follow the Goods and Services Tax (GST) system that was implemented in July last year, is expected to be brought before Parliament during the upcoming Monsoon Session.
Source-based reports suggest that businesses could benefit as the corporate tax rate could be reduced. In addition, the tax slabs for individuals could also be restructured to reduce the tax burden on salaried persons.
Not only would these measures make businesses more competitive, but they could also make the system more equitable for individual taxpayers.