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Reform Hopes Bust, Markets Tumble
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The Congress party flop in India's most politically vital state was also a blow to the tottering government of Prime Minister Manmohan Singh, reducing his scope to re-launch reforms and reverse a slowdown in economic growth.
"It has been a disaster for the Congress, it's an even bigger disaster for Rahul Gandhi and the Gandhi family," political analyst Amulya Ganguli said as results came in from Uttar Pradesh and four smaller states that went to the polls.
"They were banking on success in these elections, hoping to get at least four out of five states. It has gone exactly the opposite way. It shows that there is no charisma left in the Gandhi family."
"The results will not provide the political space for the government or the confidence to carry through unpopular reforms," Goldman Sachs said in a note. "We think the best that can be hoped for is muddle-through policies by the government."
Commenting on the election results for UP, CII Director General Chandrajit Banerjee hoped the new government will be pro active on the reform agenda and said CII would shortly present to the government its own wish list of reforms and measures.
Dealers said the election outcome would push the UPA government on the back-foot and it may not be able to carry on with reforms due to resistance from Opposition parties at the Centre.
The 30-share barometer resumed lower at 17,336.64 and hovered in a wide range of 17,691.96 and 17,128.28 before ending at 17,173.29 points, a net loss of 189.58 points, or 1.09 per cent, from its last close.
The biggest losers banking, oil and gas, capital goods, power and metal stocks closed down in the region of 1 per cent to nearly 4 per cent.
"The Congress winning the Uttar Pradesh elections would have been a welcome news for the markets since that would have ensured a smooth ride for the reforms initiated by the government at the Centre," Shanu Goel Research Analyst Bonanza Portfolio said.
As Samajwadi Party swept back to power in India's largest state Uttar Pradesh, it looked increasingly likely that it will not need the Congress' support to form a government.
According to analysts, markets were favoring the SP-Congress alliance in UP to carry out reforms at the center. If there is a Congress-SP coalition in UP, this would help the reform process much easier due to greater stability at the centre.
The markets were enthusiastic in the early hours of the day and surged over 300 points in the afternoon trade, but could not sustain gains due to underlying anxieties that exist in the coalition arrangement.
"If UP state government is formed without coalition by SP, the Congress becomes all the more weak in the overall political scenario," said K Jayraman-Research Associate-Bonanza Portfolio Limited.
"However there is a feeling that despite of any other thing SP may support Congress going forward and that may neutralize and strengthen the position of Congress at the centre. To sum up, the overall scenario for Congress post state results are not as strong as expected, but Congress is equally not in a big danger at the centre level," added K Jayraman.
K Jayraman of Bonanza further adds that any corrections now could be taken as an opportunity to enter the market at low levels. The market may find support between 4950 -5050 and after brief consolidation could move upward decisively.
However, the Congress has done reasonably well in Manipur and Uttarkhand as against other states. The main concern of the market is UP elections where the Congress has performed far below expectations.
Taking The Blame
Congress sought to shield Gandhi from blame, arguing it was up to local lawmakers to convert his electioneering into assembly seats. But later, dressed in a long white Indian shirt and smiling in front of a crush of reporters outside the New Delhi residence of his mother, Sonia, Gandhi was humble.
"I accept responsibility for the fact that we did not perform well. After all, I was the main campaigner ... the Congress party fought well, but the result is not good," the 41-year-old Gandhi said.
After speaking to reporters, he walked back to his sister, Priyanka, who put her arm around his shoulders.
There was also mostly disappointing news for Congress from other states that went to the polls over the past month. It was heading for a loss in Punjab, Goa and possibly Uttarakhand too, but was set to win in the far-flung border state of Manipur.