India's growth story is based on economic strength, not BJP winning elections

Reforms like bank privatization, shifting urea subsidy to a Nutrient Based System, and revising farm laws remain pending despite consecutive terms for the majority BJP government, led by Prime Minister Narendra Modi. (File Photo: AFP)
Reforms like bank privatization, shifting urea subsidy to a Nutrient Based System, and revising farm laws remain pending despite consecutive terms for the majority BJP government, led by Prime Minister Narendra Modi. (File Photo: AFP)


  • Domestic investors, now more influential than their foreign counterparts, are drawn by the robust India Growth Story, not political partiality

Brokerage house Morgan Stanley has said that it expects heightened volatility in India's stock market after poll results are declared in December for five states, “especially if the BJP loses a majority of those states". Volatility, the report suggests, could shoot up again after that if “in the 2024 general elections the opposition alliance, called I.N.D.I.A., succeeds in polarizing voters, thus reducing the predictability of the outcome in May next year".

“Elections have the propensity to create extreme outcomes for the stock market. Historically, the market has favored continuity and a majority government, as this implies limited policy shifts post elections. In the event, if the results go against the market's preferred outcome, we see the possibility for a draw down of 30%," the Morgan Stanley note said.

Similar commentary earlier on Indian elections was debunked in 2014 by economists, led by Prof. Maitreesh Ghatak of London School of Economics. It would be instructive to recall that the stock market had crashed in May 2004 after the Lok Sabha results were declared and it became clear that the Bharatiya Janata Party (BJP) government led by prime minister Atal Bihari Vajpayee would not continue in office, and a coalition government with the Left as a member would succeed it.

Yet, the first term of the UPA government saw unprecedented GDP growth of more than 9% year after year, with stock market returns recovering smartly, proving the initial fears of investors to be a momentary overreaction.

The economists led by Ghatak wrote in this note published in 2014 that the idea that the BJP is a more market-friendly party than the Congress (a prominent member of the INDIA alliance) has very little evidence supporting it at least in terms of capital flows.

In the six years of BJP-led National Democratic Alliance (NDA) rule from April 1998 to April 2004, the Sensex, these economists wrote, grew at compound annual growth rate of 5.9% per year. During the years under the United Progressive Alliance's (UPA) regime, this rate more than doubled to more than 16.4%. Even adjusting for inflation, which was high in the UPA years, capital gains and stock market returns during the coalition government of the UPA’s term in office were superior than those during the NDA government’s term, showing that the stock market’s (or was it FIIs that had greater sway in those days over the stock market sentiment?) apprehensions were unfounded.

Incidentally, FII inflows that were less than $3 billion a year during the NDA government, swelled to more than $25 billion a year during the UPA government’s second tenure.

Infrastructure investment as a percentage of GDP was higher during the UPA years (7-8%) than the NDA years (5%). More importantly, UPA government years saw private capital inflows into infrastructure. For instance, the Delhi airport was privatized during the UPA government’s term. Also, the private investment rate as a percentage of GDP had hit a high of more 34% during the UPA government’s term, something that has not been possible again.

Given this background, Morgan Stanley’s endeavor to link stock market returns to electoral outcomes in the upcoming state and then Lok Sabha elections next year is odd, to say the least. There’s little evidence that investors allow politics to influence their stock market decisions. Morgan Stanley’s note says that a potential change in government could lead to changes in the direction of policy reform and execution leading to poor investment sentiment. This seems like an overblown worry.

It should be clear to any long-term observer — and Morgan Stanley certainly is one — of India’s economic success that the draw for investors, especially domestic investors that hold more sway than their foreign counterparts today than any time in the past, is the inherent strength of the India Growth Story, not bias in favour or against any political outfit. Especially so when hardly any other large economy holds out as much promise as India for quick-paced development and stock market returns.

Investors are acutely aware that successive governments in New Delhi, regardless of their politics, have shown remarkable continuity since 1991 towards the broad economic policy thrust, resulting in consistently improving GDP growth performance that makes India stand out in its peer group, with an expanding consumption base and private investment engine.

The consistency and continuity of economic policy, both when reforms get done and when they don’t, can be seen from the fact that the difficult reforms such as privatisation of banks, shifting the urea subsidy to the Nutrient Based System, and farm laws remain pending even after consecutive terms for the majority BJP government, led by Prime Minister Narendra Modi. All the same, this government was able to carry through the reforms initiated by the UPA government such as inflation targeting, decontrol of diesel and petrol retail prices, widening of financial inclusion, and shifting welfare spending to the direct benefit transfers mode.

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