Indian PM Modi suffers defeat in Bihar election

CNBC with Reuters
Burhaan Kinu | Hindustan Times | Getty Images

Prime Minister Narendra Modi has suffered a heavy defeat in the closely-watched Bihar state elections, possibly opening up fresh threats to his ambitious reform program.

On Monday morning, an anti-Modi alliance led by Bihar's Chief Minister Nitish Kumar was ahead in 179 seats in the 243-seat regional assembly, an overwhelming majority, tallies compiled by the election commission showed. Modi's Bharatiya Janata Party (BJP)-led alliance was ahead in 58 seats where trends were clear.

Modi tweeted that he had called to congratulate Kumar.

The defeat in India's third most-populous state is a major setback for Modi, who has seen the optimism that accompanied his election win 18 months ago slip as crucial economic reforms suffered setbacks and doubts emerged over India's culture of tolerance.

While Modi's ruling BJP enjoys a majority in the lower house of the national parliament, the opposition has a majority in the upper house at present, hampering efforts to get crucial reform bills approved.

Bihar's polls were seen as key because Modi needs to win most state elections over the next three years to gain full control over parliament. This may have been Modi's last chance to win a state election before the spring of 2017. He faces five elections next year, all in regions where his party has failed to make inroads.

Bihar was also important for its sheer size: The state has 104 million inhabitants and only three provinces in India send more members to the upper house.

Earlier this year, the BJP lost local elections in Delhi to the Aam Aadmi Party, which calls itself the party representing the common man.

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The latest loss came as investors were already fretting over the speed at which Modi has been able to push through economic reforms, such as cutting red tape, reforming taxes and improving infrastructure investment.

"It raises the likelihood that the opposition will use this mandate to block important bills," said Milan Vaishnav of Carnegie Endowment for International Peace, of the defeat at the polls.

The failure to clinch victory in Bihar could also raise concerns that the government may adopt a more populist stance to woo voters. While Modi remains extremely popular in urban areas — only U.S. President Barack Obama has more followers on Twitter — the defeat suggests he hasn't been able to make the same headway in rural areas. Bihar is one of the poorest states in India, and also suffers from the corruption and poor infrastructure Modi had sworn to improve.

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Modi had been at the center of the BJP's efforts to woo Bihar, making the loss particularly stinging for the prime minister.

It was the most expensive state election ever fought by the BJP, with more than 90 top party figures addressing 600 rallies over the last six weeks, party officials said. Modi himself addressed 30 rallies and analysts said that no Indian prime minister had previously invested so much time in a state election.

"The fact is that the Bihar election was projected as a battle between PM Modi and Nitish Kumar," analysts at Nomura wrote in a Friday note. "Hence, Nitish Kumar's victory might embolden other regional parties, whose confidence suffered a setback due to Mr. Modi's rise. It is possible that these regional parties will coalesce in a united front to fight Mr. Modi's BJP at the center in the 2019 general elections."

Modi's campaign started with a message of economic development, then, as the race began to tighten, his party shifted to appealing to caste and religious alliances. The slaughter of cows, an animal revered by the majority Hindu population, became a major topic.

Jyotiraditya Scindia, a leader of the opposition Congress party, said the BJP must end campaigning on issues that fracture the country along religious lines.

"This is a decisive mandate against divisiveness in favor of development," he said.

Ram Madhav, a BJP general secretary, acknowledge that there are "lessons to be learned" from the Bihar election.

"The Bihar election was a very important battle for us. We will have to analyze each and every aspect of the result," said Madhav.

The Nomura analysts, however, said that they did not expect the defeat to dramatically change the pace of reform over the coming year. "Reforms will remain as hard (or as easy) as they have been so far," they wrote.