Singh’s alliance has since cracked under corruption scandals. The results of recent state elections will only make it harder for him to unify his political partners and push through the reforms that India’s slowing economy needs.

The results of month-long elections showed that the Congress party performed poorly in three of the five state polls. The most disappointing result was in northern state of Uttar Pradesh, India’s most populous state that, as home to more than 200 million people, is considered to be the political battleground state. Congress was banking on boosting its holding of 22 seats in the 403-seat assembly to at least 80 seats to enable it to form a coalition at state level with the socialist Samajwadi Party so it could cement this party’s support at federal level.

Even though Congress’ bid for power was headed by Rahul Gandhi of the Nehru-Gandhi dynasty that has dominated Indian politics since independence in 1947, the Samajwadi Party won a comfortable majority in the state from the tainted Bahujan Sarnaj Party (whose leader is fond of building statues of herself) – gaining at least 220 of the 403 seats. Congress only won at least 28 seats, to come fourth in a state that sends most MPs to the Lok Sabha, as India’s lower house of parliament is called.

The result follows a bleak 2011 for Congress at a national level and portends poorly for the next general elections in 2014, especially now its hoped-for prime minister Gandhi failed to win over voters. Numerous corruption scandals over the past 12 months or so have scuttled the government’s reform drive as smaller coalition partners have splintered off and thwarted any significant changes.

The most glaring reform defeat was Congress’ announcement last year that India would allow foreign department store owners such as Walmart to set up in India. This decision, which didn’t require the passing of any laws, was overturned within days after Congress’ coalition partners, opposition parties and state governments objected to a move that is seen as threatening the family-run stores prevalent throughout India. Other stalled reforms include attempts to clarify land acquisition, strengthen anti-corruption measures and overhaul insurance and investment management.

Investor verdict
Congress was hoping that a strong performance across the five states would pressure its rebelling federal coalition partners or prompt its outside supporters such as the Samajwadi Party to push on with reforms. Better results may have also improved the morale and determination of Singh’s rattled-looking government.

Even if a Congress-led coalition holds onto power in 2014 (and Congress has ruled India for most of the post-independence era), it’s now more likely to be a far more unwieldy coalition than the one that so excited investors in 2009. The Congress-led coalition that ruled India from 2004 to 2009 was a disjointed coalition that included Communist MPs.

Investors were disappointed with the state election results. “We view the election results as negative for economic reforms and the markets, though a key uncertainty has been lifted,” said Goldman Sachs in a report on the election.  “We think the results will not provide the political space for the government or the confidence to carry through unpopular reforms.”

Congress did win a majority in the northeastern state of Manipur and in the Himalayan state of Uttarakhand, but it fizzled in the northern state of Punjab (won by the incumbent alliance of the Shrimoni Akali Dal and Hindu-based Bharatiya Janata Party) and in the western state of Goa (won from Congress by the Bharatiya Janata Party).

Congress has much work to do to spark another rally in shares.

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