With India on the brink of a pivotal election and incumbent Prime Minister Narendra Modi vying for a historic third term, investment management company Franklin Templeton (FT) observed that investing before elections can be strategically advantageous.
With India on the brink of a pivotal election and incumbent Prime Minister Narendra Modi vying for a historic third term, investment management company Franklin Templeton (FT) observed that investing before elections can be strategically advantageous.
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), over the one year following the election result date.
On average, the stock market yielded a 3 percent return within roughly a month (22 trading days) following the election date, mentioned FT. Yet, it's noteworthy that most stock market gains typically occur before the election, with an average return of 10 percent in the four months (88 trading days) leading up to the election results date.
FT's analysis covering the past seven elections, revealed a unique instance 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 annualised) over the two-year span surrounding the election, it noted.
"High expectations for the BJP-led government's re-election under Atal Bihari Vajpayee characterized this period, buoyed by the optimistic "India Shining" campaign. Contrary to expectations, the Congress-led United Progressive Alliance (UPA) won, initially leading to a 13.75 percent drop in the Nifty Index over the month following the election (22 trading days). However, the market recovered in the following year due to strong economic indicators," it stated.
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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 after the election, it further informed.
BJP's 10-year tenure
Since 2014, the Bharatiya Janata Party (BJP) has held sway over the Indian government. Current polls indicate a resurgence of Prime Minister Narendra Modi's popularity, likely ensuring his return to office in the upcoming elections, albeit possibly with a reduced parliamentary majority for his party. Opposition forces have coalesced into a 26-party coalition known as INDIA, yet their challenge remains fragmented due to the absence of a singular leader capable of rivaling Modi's influence, said FT.
FT highlighted that during its tenure, the BJP-led government has implemented substantial improvements, evident in the expansion of social welfare programs and the efficient utilisation of the country's robust public digital infrastructure for direct benefit transfers, minimising discretion in beneficiary selection. Over 300 programs, spanning from subsidised cooking gas cylinders to housing subsidies, have reached nearly 950 million individuals, with the government spending totaling US$270 billion since 2017. Access to sanitation facilities has markedly improved, while initiatives such as rural electrification and housing construction have positively impacted citizens' lives, it added.
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Furthermore, investors have welcomed initiatives such as the reduction in corporate tax rates, the privatisation of the national carrier Air India, and the increased cap on foreign investment in insurance and defence 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 restrained pre-election spending, said the investment company.
What to expect in Modi's likely third term?
For a potential third term, investors anticipate the government to address outstanding priorities and pursue unfinished agendas, aiming to sustain and amplify the momentum of economic reforms and development initiatives.
As per FT, in Modi's likely third term, investors foresee the government continuing the "Make in India" drive to attract Foreign Direct Investment (FDI). They anticipate the enactment 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 subordinate courts is also anticipated positively.
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Also, state tariff-setting bodies still control electrical power pricing, struggling to balance political interests and consumer needs for affordable power. Despite the revolutionary introduction of the Goods & Services Tax (GST) in 2017, it remains incomplete, excluding electricity, oil and gas, real estate, and alcohol. Investors advocate for a reduction in the current five GST rates to a single rate. Additionally, they advocate for the privatisation of public sector banks and a cessation of government-driven lending to priority sectors, added FT.
It noted that there is a lot of goodwill toward 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 an unrepeatable opportunity because the framework for political representation in India could be radically different in five years, noted FT. Why? Because uneven population growth could radically change Indian election dynamics and the resulting policy direction in the future, opined the investment firm.
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"Overall, India has a relatively fast-growing population. But within India, there is a wide variance. Broadly speaking, the southern states' fertility rates have dropped to below replacement rates, with Kerala's 1.5 percent close to Norway's 1.4 percent. In the north, Bihar's level is at 3.4 percent In common with 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 "Emergency,"6 Parliament passed a constitutional amendment that froze the number of seats each state held, in accordance with the 1971 census. The freeze was to end in 2000, but it was extended to 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)," explained FT.
FT believes that there will be a significant change that will logically alter the political power balance of the states, resulting in changes in policy direction, which it thinks could be significant for investors in the future.