In big boost, Indian PM Modi’s party emerges strongest in state poll

Indian Prime Minister Narendra Modi's ruling party was set on Tuesday to win the largest number of seats in a big southern state election, giving him momentum for a re-election bid next year and opening a path for more reforms.

A government in Karnataka led by the Bharatiya Janata Party (BJP) will help Modi silence critics who said his popularity had waned after the rocky adoption of a nationwide sales tax and a ban on high-value bank notes late in 2016.

The BJP was leading in 105 seats in Karnataka's 225-member state assembly, the Election Commission of India said, with the opposition Congress party leading in 75.

A party must have 113 seats to form a government and the BJP will probably have to seek the backing of smaller parties.

The Congress said it was ready to support a regional party that was coming third to form a government to stop the Hindu nationalist BJP from taking power.

But analysts said the state governor would likely ask the BJP to make a bid for power because it would emerge as the biggest party in the new house.

"The result provides some reassurance to the BJP that its popularity remains intact," said Shilan Shah, a senior India economist at Capital Economics.

"That could embolden the government to pursue reforms in future, including loosening foreign direct investment restrictions and moves towards privatisation."

If it forms a government in Karnataka, the BJP and its allies would govern 22 of India's 29 states.

A strong showing in the state, which has a population roughly equal to that of France, would allow Modi to aggressively push forward his reform agenda without fear of political backlash.

It also gives the BJP a southern beachhead, besides its core base in India's north and west.

LESS CHANCE OF 'POPULIST ACTIONS'

In the last four years, Modi has moved to boost the economy, but shied away from politically sensitive reforms to revamp the labour sector and land acquisition, which the World Bank called for in March.

His government faced sniping in recent weeks over soaring fuel prices, a decision to privatise state carrier Air India and a lack of jobs for millions of young people entering the workforce every year. Higher oil prices have added to inflationary pressure.

But the favourable vote for the BJP would reduce the chances that Modi would need to compensate for unpopular reforms with pre-election handouts.

"If this regional election had resulted in Modi losing, that could have potentially raised the risk of more populist actions," said Aidan Yao, senior emerging Asia economist at Axa Investment Managers in Hong Kong.

Modi's victory in Karnataka, where he led his party's campaign, showed he remains the top vote-getter in Indian politics, leaving Rahul Gandhi, the young leader of the main opposition Congress party, struggling.

"The win definitely enhances the prospect of Prime Minister Modi for another term," said political commentator N. Ram.

The benchmark stock NSE index gained more than 1 percent and 10-year government bond yields were steady at 7.86 percent despite inflation surprising on the upside earlier in the day.

Farm distress in Karnataka was an election issue, as it is in other parts of India, and Modi could still raise spending on farm subsidies, rural employment, health insurance and housing, an official said.

"In the coming months, we could see more allocations for jobs programmes, healthcare and the farm sector," another senior government adviser said.

MODI VS GANDHI

Karnataka, with a population of 66 million, is home to the technology hub of Bengaluru. It is the first major state electing an assembly this year, to be followed by three more.

Celebrations erupted outside the BJP headquarters in Bengaluru, with supporters shouting victory slogans and waving the party flag as results trickled in.

The loss of the state is a major setback for Congress and its president, Gandhi, the fifth-generation scion of India's famed Nehru-Gandhi dynasty.

"His authority is weakened and it is difficult for the Congress now to stake a claim on the leadership of the opposition," said Satish Misra, a political analyst at the Observer Research Foundation in New Delhi, the capital.

Congress was "disappointed" with the results, said its spokesman Sanjay Jha, but he defended Gandhi's campaigning.

"He raised issues that mattered, unlike PM Modi, who indulged in hollow rhetoric," Jha told Reuters.