Assessing the impact of past elections, FT observed that despite the risks, the Indian stock market, as measured by the S&P CNX Nifty index, has consistently offered positive returns after elections, as seen in 2004 (16.1 percent), 2009 (38.7 percent) and 2014 (14.7 percent), during the one year after the election result date.
On average, the stock market gave a 3 percent return within about a month (22 trading days) after the election date, said FT. However, it is noteworthy that most stock market gains usually occur before the election, with an average return of 10 percent in the four months (88 trading days) before the date of the election results.
The FT’s analysis covering the past seven elections, revealed a unique case in 2004 when the market declined both before and after the election. This election was exceptional, marking a period of significant volatility but ultimately delivering the highest returns of 108 percent (44 percent annually) during the two-year period surrounding the election, it noted.
“High expectations for the re-election of the BJP-led government under Atal Bihari Vajpayee characterized this period, supported by the optimistic “India Shining” campaign. Contrary to expectations, the Congress-led United Progressive Alliance (UPA) won, initially leading to 13.75 -percent fall in the Nifty Index during the month after the election (22 trading days). However, the market recovered in the following year due to strong economic indicators,” it stated.
The 2009 elections also stood out, with the stock market gaining 73.2 percent around 90 days before and after the election result date, driven by expectations of political continuity and economic growth. The UPA’s victory and formation of a stronger coalition led to a market rally, with the Nifty soaring 23.1 percent within a month of the election, it further informed.
BJP’s 10-year tenure
Since 2014, the Bharatiya Janata Party (BJP) has ruled over the Indian government. Current polls indicate a resurgence in Prime Minister Narendra Modi’s popularity, likely ensuring his return to office in the next elections, albeit perhaps with a reduced parliamentary majority for his party. Opposition forces have joined a 26-party coalition known as INDIA, but their challenge remains fragmented in the absence of a single leader capable of rivaling Modi’s influence, FT said.
FT highlighted that during its tenure, the BJP-led government implemented major improvements, evident in the expansion of social welfare programs and the effective utilization of the country’s robust public digital infrastructure for direct benefit transfers, minimizing discretion in beneficiary selection. . More than 300 programs, ranging from subsidized cooking gas candies to housing subsidies, have reached nearly 950 million individuals, and government spending totals $270 billion as of 2017. Access to sanitation facilities has improved dramatically, while initiatives such as rural electrification and housing construction have. positively influenced the life of citizens, it added.
In addition, investors welcomed initiatives such as the reduction of corporate tax rates, the privatization of the national carrier Air India, and the increased limit on foreign investment in insurance and defense sectors. Their perception of the recent interim budget suggests a commitment to fiscal discipline, with a slightly reduced deficit target for fiscal year 2025, signaling limited pre-election spending, the investment firm said.
What to expect in Modi’s likely third term?
For a possible third term, investors expect the government to address outstanding priorities and tackle unfinished agendas, aiming to continue and strengthen the momentum of economic reforms and development initiatives.
According to FT, in Modi’s likely third term, investors anticipate that the government will continue the ‘Make in India’ drive to attract Foreign Direct Investment (FDI). They anticipate the approval of new labor laws and increased infrastructure funding, as evidenced by the $130 billion allocation in the 2024 interim budget, crucial for FDI attraction. Filling vacancies in high and lower courts is also anticipated positively.
Also, state tariff bodies continue to control electric power prices, struggling to balance political interests and consumer needs for affordable power. Despite the revolutionary introduction of the Goods and Services Tax (GST) in 2017, it remains incomplete, excluding electricity, oil and gas, real estate and alcohol. Investors are advocating for a reduction of the current five GST rates to a single rate. Moreover, they are advocating for the privatization of public sector banks and an end to government-driven lending to priority sectors, FT added.
It noted that there is a lot of goodwill towards India, but international investors have high expectations; post-election policy execution is key to building investor confidence and therefore FDI is very important.
But there is another reason to treat this term as a once-in-a-lifetime opportunity because the framework for political representation in India could be radically different in five years, FT noted. Why? Because uneven population growth could radically change India’s electoral dynamics and the resulting political direction in the future, the investment firm opined.
“In general, India has a relatively fast-growing population. But within India, there is wide variation. Broadly speaking, the fertility rates of the southern states have fallen below replacement rates, with Kerala’s 1.5 percent close to Norway’s 1.4 percent. In the north , Bihar’s level is 3.4 percent. Like other democracies, India has a system of allocating political power in relation to the size of the population in its regions. But in 1976, during the “Crisis”,6 the Parliament passed a constitutional amendment. this froze the number of seats each state held, according to the 1971 census. The freeze was supposed to end in 2000, but it was extended until 2026. The demographic changes in these 50 years are significant. For example, representation for Bihar (population 95 million) is lower than for Kerala (28 million),” FT explained.
FT believes that there will be an important change that will logically change the political power balance of the states, resulting in changes in political direction that it believes could be significant for investors in the future.
Disclaimer: The opinions and recommendations made above are those of individual analysts or trading companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 29 Feb 2024, 11:38 IST