Election of Market Direction

Upcoming Lok Sabha election in 2014 would set the direction of the Indian equity market as well as decide the growth prospects of the country. Recent ongoing polling analysis shows that BJP will come in ruling seat by defeating Congress party in majority vote. However it is very tough to predict the election outcomes, especially in politically uncertain environment. The 16th Lok Sabha election in India most probably will be held on May 2014, however the state elections in four states will gauge the response to Narendra Modi led BJP’s elevation as Prime minister. Going forward, it is believed that the election could act as a catalyst to boost the nominal gross domestic product (GDP) growth and return on equity.

Importance of 2014 election

India’s economic condition is going through hard times with GDP growth touching new lows and creeping inflation is not giving room for RBI to lower the key policy rates (repo rates). Moreover, the rupee has plunged against the US dollar, increasing current account deficit and refraining foreign investors from investing in India. Moreover it is witnessed that corporate profitability is shrinking on quarter on quarter basis. These domestic macro concerns put the upcoming 2014 elections in a different context compared to the last three elections held in India. The responsibility of the new government will be to reverse the economic free fall, which will require strong policy action to encourage investments. Hence a government with big majority is best placed to drive India’s growth revival and for that a clear and decisive mandate from voters is needed to allow such government to pursuing reforms with greater vigor and meaningful impact.

Stock market always reacted to the outcomes of the elections held in India. It has been seen that the electoral results have had strong impact on the stock market, following the 2009 election results, the market rallied 17% over two days as the ruling congress won the election with a clean majority sweep. In 2004, after BJP lost decisively to Congress coalition (supported by left-wing parties) unexpectedly, market plunged 17% in two days, proving that there is a strong correlation between election results and stock market as the strong and clear majority government would be able to improve the macro economic conditions of a country. The new government in the country is likely to set the tone for policy and growth over the next five years, deciding the country’s economic growth prospect. The current UPA Government’s populist agenda including the National Rural Employment Guarantee Scheme (NREGS) has been the hallmark of its five year term. However, in contrast, the BJP is more fiscally conservative, with a development focused agenda

                        

                                     

The uncertainty around the election is always a key risk to the Indian economy, when an unclear mandate emerges. This happened when Congress formed government with much weaker mandates in 2004 (145 seats) and 2009 (206 seats). It has been seen that a weak leadership largely made up of regional parties, each with their own agenda were incompetent of pursuing the bold reforms needed to kick start India’s economic growth. In this scenario, it would lead a period of prolonged weak and patchy policy making.

Economic downfall during UPA -II regime

The biggest failure of the current government has been on the economic front, with GDP growth slowing down from an average of 8.5% over FY04-FY11 to 4.4% in 1QFY14 due to lack of policy reforms, delay in large projects approval, resulting in stalled projects and inability to pick up investment cycle. Moreover, the slowing growth is compounded with rising inflation, which is eating the profitability of the corporate as well as lowers the savings of the common people. Headroom for the central bank to respond has been limited due to inflation, high fiscal and current account deficits and rupee depreciation (down 43% in the current government’s rule to an all-time low). Even in 2012, April, the economic condition has been so severe that rating agency Standard and Poor downgraded India’s international ratings outlook to negative, which caused a serious threat to economic growth of the country. Besides economic slowdown, two major scamps which come to the forefront are the 2G spectrum allocation and coal blocks allocation.

Current India’s Parliamentary structure

Opinion poll shows BJP might have an upper hand

The latest opinion poll shows that the electorate is giving a more decisive mandate in favour of BJP with 175 seats as opposed to the findings of July 2013 poll which suggests’s that the base case was of a BJP led coalition forming the Government in the Central. The prediction of BJP getting the 175 seats and at the same time forming the Government, BJP would likely garner the support from seven regional parties namely Shiv sena, Akali Dal, Trinamool congress, AIADMK, BSP, BJD and TDP, thereby generating a tally of 273 seats. Thus it is expected that BJP coalition would form the government, breaching the 272 seat mark comfortably. On the other hand it is expected that the Congress is likely to get 233 seats (Congress + UPA allies + Left Front + SP + DMK + JDU + TRS + YSR Congress + JDS). Narendra Modi’s pro business approach getting popularity among young generation and survey shows that Modi leads popularity by a very wide margin when it comes to first-time voters. The survey only covers the currently enrolled voters and it is expected that the enrolments amongst first time voters are likely to increase as the General Election will approach. This dynamic could increase the number of seat counts for BJP in coming Lok Sabha election.

India opinion polls (seat projection for 2014 election)

State Elections in four states is an important event to watch out

Before the general elections in April 2014, state assembly elections will be held in Chhattisgarh, Rajasthan, Madhya Pradesh and Delhi and the outcomes of these elections is important to gauge the response to Narendra Modi’s elevation as the BJP’s prime ministerial candidate. The opinion polls of the four state elections show that BJP is set to win 3 of the 4 election bound states. The results of all the four state elections will be announced on 8 December 2013, which seems to be an important event from a stock market perspective. Market will factor the outcomes of the elections and any deviation from the expectation would have an adverse effect on the stock market. Of these four states, Rajasthan is the state that will be a litmus test of the pro BJP sentiment. If on 8 December 2013, it becomes clear that the BJP wins Chhattisgarh, MP as well as Rajasthan then the market is likely to factor in BJP’s victory in General Election. Though there are many slip in between the lip and the cup and predicating a concert election outcome is impossible. Only probabilities can be assign to the outcomes. 

Opinion polls of four state elections

The momentum of the Indian stock market would sustain for prolonged period if the 2014 election outcomes comes in line with the expectation. The 2014 General election could act as a key catalyst for Indian economy as the economy is facing of number macroeconomic challenges following with slowing growth, rising inflation, lack of policy reforms and large number of stalled projects. A strong, sustainable and pro active government in the Central would improve the macro factors of the country and also resume the investment cycle which as of now remains sluggish. Implementation of reforms at different levels would regain the investors’ confidence and thus boost economic growth of the country. Whilst it is expected that India would attract more foreign investments and the stock market could witness more inflows from abroad, which could drive the index to a newer orbit altogether.