Impact of Elections on the Indian Economic Market: History So Far

Elections in India have far-reaching consequences, affecting not only the political landscape but also the stock market and economy.

From Dalal Street to the common labourer, everyone experiences a sense of unease during the election period.

But just how much influence does a ruling party have on the future of India's market?

Political transitions can trigger changes in government policies, economic priorities, and regulations, subsequently affecting various sectors and companies.

While elections introduce volatility in the short term, the long-term effects are primarily determined by the economic reforms and policies implemented by the ruling party. To better comprehend this relationship, it is crucial to analyze historical examples.

In this blog, we will delve into the historical data to explore the impact of elections on the Indian market and economy, shedding light on the importance of policy continuity, economic reforms, and stability for sustainable growth.

Impact of Elections on the Indian Economic Market

• The Year 1989 and the Coalition Era

In 1989, controversy surrounded the Indian government under PM Rajiv Gandhi, leading to a united opposition forming the National Front coalition.

This political change significantly impacted the stock market and economy, resulting in increased volatility and economic fluctuations.

Despite subsequent reform and anti-corruption measures by the new government, the election aftermath disrupted the market and overall economy.

• The Year 1991 and the Congress Era

The assassination of PM Rajiv Gandhi in 1991 further exacerbated the current market volatility.

The economy suffered from a high Gross Fiscal Deficit, inflation, and limited forex reserves. However, under PV Narasimha Rao's leadership, the Congress party regained market confidence by implementing reforms, liberalizing the economy, and attracting global investors.

These measures stimulated economic growth and initiated a positive trend in the stock market.

• The Year 1996 to 1998 – Unstable, Coalition Government

The years 1996-1998 were marked by political instability and the impact of the Asian Financial Crisis.

With three different prime ministers and a lack of stability, market confidence dwindled, adversely affecting the Indian rupee and export-oriented industries.

• The Year 1999 – NDA in Power

The election victory of the National Democratic Alliance (NDA) in 1999, led by Atal Bihari Vajpayee, brought a sense of stability to the market.

As the results were within the expectation of the market, Sensex rallied about 7% and continued the upward trend for the next three months. As a result, the GDP growth rate reached around 6-7%.

The government's focus on fiscal discipline and economic stability further restored investor confidence, leading to a positive trend in the stock market and increased foreign direct investment inflows.

The government's focus on structural reforms, sector liberalization, and attracting foreign investment revitalized the economy, resulting in increased GDP growth, controlled inflation, and favourable market performance.

However, within the next two years, it fell around 50% due to domestic and global factors such as the 9/11 attack. As a result, at the end of the NDA government tenure, the annual compound return was just 3%, and the absolute performance was over 14%.

• The Year 2004 – Congress Back to Power as UPA

After the 2004 election result, the market lost 15% in 2-3 trading sessions as the results were not according to the market sentiment.

Congress had formed a government while the market hoped for an NDA government. After the initial disappointment, the market saw a bull rally till late 2007, accompanied by a robust GDP growth rate of around 8% and a record-high Foreign Direct Investment of $34 billion in 2007.

The global financial crisis of 2008 brought an end to the bull market, but the market started recovering in 2009 by the time India went to the polls.

• The Year 2009 – Congress Continues for a Second Term

In 2009, UPA came back to power.

The market gained 17% in a single day, but as the second tenure of the UPA government was filled with scams, the market remained choppy.

The decline in investor confidence during the UPA government's second term had adverse effects on domestic and foreign investments, leading to reduced capital inflows.

Uncertainty surrounding policies and regulatory stability further hampered investment decisions and economic growth. Additionally, the UPA government struggled with managing fiscal deficits and controlling inflation, creating an unfavourable economic environment.

These factors, combined with the impact of the global financial crisis of 2008, resulted in an economic slowdown and increased volatility.

Even though confidence in the government was low, the Sensex managed to gain 15.5% during the first three years. 

• The Year 2014 – NDA Comes in with BJP in Full Majority – Modi Wave

When the NDA came into power again with a full majority in 2014, the market experienced a significant boost in investor sentiment.

The reduced volatility, with the market's standard deviation dropping to 9.1% from 17.96%, indicated a more stable trading environment. The stock market also witnessed a substantial rally, reaching record highs.

The primary reason behind this positive market response was the expectation of economic reforms and the anticipation of a stable government under the NDA. However, it's important to note that the stock market's growth rate during the subsequent four years was around 40%, which some analysts considered relatively slow given the NDA's majority status.

Several factors, including global conditions like high oil prices and a weakening Indian rupee, may have contributed to the perceived slower growth.

Nevertheless, the overall impact of the NDA government's policies and market sentiment was instrumental in driving the initial market euphoria, reduced volatility, and record-high levels of the stock market.

• The Year 2019 - BJP Remains in Power 

During the 2019 election period in India, the stock market exhibited a notable correlation with the political landscape. As the election approached, investors closely monitored the political developments and their potential impact on the economy.

The stock market experienced periods of volatility, with fluctuations in response to election-related news and expectations. However, the outcome of the election, which resulted in a decisive victory for the Bharatiya Janata Party (BJP) and the re-election of Prime Minister Narendra Modi, was met with a positive market response, as it provided a sense of stability and continuity for investors.

Post-election, the market witnessed a significant upswing, with several key stock indices reaching record highs. This rally was attributed to the expectations of continued economic reforms and policy continuity under the BJP-led government.

The government's pro-business stance and emphasis on initiatives such as "Make in India" and infrastructure development were seen as favourable for the market. Additionally, the ease of doing business, tax reforms, and efforts to attract foreign investment were viewed positively by investors. 

However, some exogenic and endogenic factors didn’t allow for the full realization of this growth. These include global trade tensions, structural issues in critical sectors, and challenges in the baking sector. 

Let’s Rewind

We can also look at the performance of Sensex in the past five Lok Sabha elections to gauge the performance of what it has been like in the markets three months before and after the elections.

We can witness the following by looking at trends that have emerged six months after the election results:

Conclusion

The analysis of the impact of elections on the Indian market and economy reveals that while short-term volatility is inevitable during election periods, the long-term trajectory is determined by the government's policy actions and their ability to foster a conducive business environment.

The stability of the government, whether in the form of a majority or a coalition, plays a crucial role in instilling confidence among investors. Moreover, the historical trends highlight the importance of policy continuity and economic reforms in driving market performance.

While elections introduce volatility, the focus should be on the government's ability to provide stability and implement effective measures for sustainable economic growth. Ultimately, informed investment decisions should consider the broader economic landscape and reforms rather than being solely influenced by election outcomes.