Indian stock performance is not dependent on electoral results

long-term record shows that equity returns and economic reforms are correlated but neither are hurt by political shifts

- ARVIND CHARI

On 17 May 2004, Indian stock markets hit their -20% lower circuit. The Bombay Stock Exchange’s Sensex fell by 842 points, then its steepest ever one-day fall. The National Democratic Alliance (NDA) led by the Bharatiya Janata Party ( BJP) had lost that year’s general election to the United Progressive Alliance (UPA) led by the Indian National Congress (INC). That the UPA was supported by communist parties seemed to have spooked the markets into believing that India’s economic reform momentum would end and growth would stall. I joined Quantum in August 2004 and my boss and its founder Ajit Dayal guided me to write my first research piece, a simple analysis to show that election results do not matter to long-term returns. India’s GDP growth and market returns are uncorrelated with the government in power, Indian corporates are used to this loud and messy democracy, and any market correction due to just a change in government is a buying opportunity.

Between 1980 and 2004, the central government changed seven times, with four of those run by coalitions. The average real GDP growth in that period had risen to 5.8%; the Sensex delivered compounded annual growth of 5.8% in dollar terms and 16.3% in rupee terms.

India’s reforms initiated in 1980 have continued under all governments, be it coalition or single party; be it tilted to the left or the right.