>INDIA VIEWS (GOLDMAN SACHS)

Election update—exit polls show Congress-led alliance ahead in close finish

Exit polls put the Congress as the single largest party and the ruling coalition UPA getting the most seats. The average of the polls puts the number of possible parliamentary seats for Congress at 154 and for the UPA at 196. The seats for the BJP are pegged at 146 and its alliance, the NDA, at 187. The Left is estimated to get 35 seats. If the exit polls are accurate, both the UPA and NDA would increase their seats in Parliament at the expense of the Left and other regional parties (see Exhibit 1).

The exit poll results are largely in line with expectations. Internal press polls and the grey market were expecting such an outcome (see The elections—the end of the beginning, India Views, May 11), although the race between the UPA and NDA appears to have become closer. If the exit polls are accurate, then the UPA would likely come to power after building a coalition with some regional parties, including the Left. The worst fears of the market would be alleviated, i.e., the likelihood of the Third Front playing a major role in the new government. However, neither would the best scenario play out— that of a government which does not include the Left parties. We believe the reduction in the seats of the regional parties is a positive sign for decision making. Further, given the experience of the past 5 years, the UPA is skilled at building coalitions, which could provide some comfort that a stable government will ensue post-elections.

Exit polls, however, have a dubious record of predicting the actual number of seats. In 2004, they famously got the results wrong when they predicted a big victory for the NDA, but the UPA won the elections (see Exhibit 2). The official results will be announced on May 16, after which the President will play a crucial role. She may invite either the single largest party (possibly Congress or BJP) or the single largest pre-poll coalition (UPA or NDA) to form a government. According to precedent, the single largest party usually gets invited to form the government (e.g., in 1996). That party will then start the process of building a coalition with regional parties in order to get a majority in Parliament. The entire process must be finished by June 2. We expect uncertainty about the nature and composition of the coalition which forms the next government to continue over the next several days, and equity and currency markets to be volatile as a result.

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