There is a quite not-so-heard theory about elections, known as Presidential Election Cycle theory. Although it was developed keeping America in mind, we can apply some of its points to India as well. The theory was the creation of Yale Hirsch in the mid-1900s, where he stated that the first year after the elections is the weakest for the economy and stock market. After the first year, the market and economy improve until the next election comes.
The old theory and its implications
The theory is quite old and not the primary factor, but it shades some light on how the economy and markets used to react to elections at that time. As per the theory, after the elections, the elected leader usually focuses on the promises made by him, which enables him to take decisions on important points like reforms and changes. The second year is more or less a carbon copy of the first one, and thus markets and economy do not witness any significant behavioural changes. The third year comes with the ominous winds of elections, and hence essential reforms and tax amendments are taken to boost the economy, and they eventfully result in a bullish change in the stock market. The final year proves to be very beneficial for the economy as necessary steps are continuously taken to increase growth, create employment, etc. and again at the time of the election, the cycle restarts and then follows a similar pattern until the next polls turn up.
The Indian touch
Whether it is the recent state elections of Gujarat and Himachal Pradesh or the general election of 2019, they have a considerable effect on the economy of India. BJP won in Gujarat elections by 99 seats, which, although marked a reduction vis-a-vis the previous election, re-emphasised the national influence and power that the Bhartiya Janta Party possesses.
In 2018, assembly elections are going to be held in Chhattisgarh, Karnataka, Madhya Pradesh, Meghalaya, Mizoram, Nagaland, Rajasthan and Tripura. So if the existing central government gets successful in the majority of states, it will signify its prospects of winning the general election of 2019. It leads to a public perception that like the two major moves, viz. demonetization and roll out of the Goods and Service Tax, the government will continue to implement steps in the future for economic reforms and boost the economy.
The Gujarat lesson
The not so easy victory of BJP in Gujarat means that the Modi Government will have to take very rigorous steps to appease the people as well as to win the assembly elections in 2018, followed by general elections. That means we can expect a budget satisfying the common man in the coming year. As per the head of research at UBS Securities India Pvt. Ltd., Gautam Chhaochharia, the victory of BJP in Gujarat signals that they will continue on their policy that includes reforms, anti-corruption and fiscal consolidation agenda. It will turn out to be positive for the economy and the stock market, in the long run, he added.
It will also be fruitful for overall development. The Chief India economist at Nomura, Sonal Varma, said that it will lead the centre to focus on increasing rural development, like a hike in minimum support prices and rural infrastructure spending, along with an increase in budget allocation for infrastructure, women and social development schemes.
What it means for the stock market
Between the race of BJP and Congress, the stock market is the most dramatic factor. Sensex cracked down by 2.59 percent, an 867-point decline, and Nifty 50 index slumped by as much as 2.5 percent with the early news of Congress leading in Gujarat, but later recovered with the eventual victory of the BJP.
As per the research head at ICICI Securities, Pankaj Pandey, keeping in mind the significant reforms being implemented, the market will focus on growth at the end of the year and expects a double-digit earnings growth value in the next year. Also, they estimate Nifty to go up by 12 to 13 percent in 2018.
What to expect
The growth of the economy depends upon the elections’ outcomes. The historic steps that the government have taken are fairly unique, and just like it had led to a slump in the GDP growth to 5.7 percent, it has also been able to boost it back to 6.3 percent. The fiscal stimulus plan for the banking sector, projects like “Make in India”, participation and contribution in pacts with other nations, etc. have been well executed by the current government and thus their victory stands to usher in happy times for markets eventually.
P.S- This article was originally published in the Qrius (Formally the Indian Economist)
By Devanshee Dave