Indo-Pak tension: Elections come at critical time

India's general elections come at a critical juncture for its economy amid tensions with Pakistan, a top Singapore bank has said.

In a report on India's economy, the DBS Group said that despite some reforms, a welcome improvement in the business climate and a discernible decline in governance lapses, growth has been lacklustre.

The savings-investment gap remains large, external vulnerabilities loom against an improved but still, modest buffer to absorb shocks, and financial sector stress remains high, according to a DBS Group Research team.

Prime Minister Narendra Modi continues to govern with strength and has considerable popularity, but a recent spate of state election setbacks and some fledgeling governance scandals have dented the aura of inevitability from the elections, said the report.

"A spike in political tensions vis-a-vis Pakistan is another complicating factor," said Chief Economist Taimur Baig and Economist Radhika Rao at the DBS Group Research.

The resumption in border tensions comes at a tricky time for both the countries as India heads into general elections in April-May, while Pakistan's economy is on a weak footing, it said.

The team, analysing the impact of the elections on the economy, said that growth, on an average, slows a quarter before the elections but rises subsequently.

Inflation tends to pick up post elections. However, price dynamics are quite benign this time, easing concern on this issue, it said, adding equities rise prior to the election but pull back thereafter.

It said that apart from earnings and valuation, the global environment is also a big influence on these trends.

The rupee tends to appreciate before elections, extending the rally for a quarter after, before turning stable-to-weaker, the research team said.

The general elections, slated for April/May, is a herculean undertaking, wrote Baig and Rao in the report.

Over 800 million people will cast their votes across 29 states and seven union territories, electing 543 members, with the majority party or alliance forming a government to lead the world's largest democracy for the next five years, the report added.