What's on the ballot for India's economy?

This is an abridged version of our Thematic Report “India’s economy and markets around elections” (click here for access to the full report and here for a Insights video)

How will the world’s largest elections impact India’s economy?

India’s upcoming lower house elections in April/May will see more than 800 million people cast their votes across 29 states and 7 union territories, and elect 543 members. The majority party or alliance will form a government to lead the world’s largest democracy for the next five years.

In this milestone event, how will India’s economy and markets fare?

Growth

On average, growth slows a quarter before the elections, but rises three quarters after, by an average of ~200-250bps. As election-related uncertainty eases, private sector investments return, and the government resumes capex spending plans. Consumption-boosting measures will resume, and encourage spending.

In FY19, real GDP growth is likely to decelerate from 8.2% YoY in the June 2018 quarter to sub-7% by the March 2019 quarter, with full-year growth at 7.1%. Our GDP Nowcasting model for India indicates further slowing of growth momentum in 1H19. Stability is, nonetheless, likely in 2H19 as political uncertainty fades, fiscal pro-consumption measures kick-in and private/ public spending returns.

Inflation

Past cycles show that, on average, inflation eases before elections, and then rises.

Inflationary trends are equally influenced by factors outside of the polling cycle. These include oil prices, administrative changes, crop production, monsoon and support prices. Since the RBI moved to an inflation-targeting framework three years back, price dynamics have changed significantly. India has transitioned from high, double-digit inflation to 4-5% in FY16 and FY17, slipping below, and remaining at 4% since last year.

Foreign portfolio and investment (FPI) flows

On average, flows vary from stable to weak in the three quarters prior to the elections, followed by an improvement in the three quarters after uncertainty eases.

Portfolio flows are also driven by global risk-appetite and domestic developments. Elections with an uncertain verdict tend to increase volatility, which if accompanied by broader risk-off environment, could amplify the sell-off. Better risk sentiments at the start of 2019, a cautious Fed and firmer asset markets have drawn flows back into Asia.

For FDI, around past elections, trends have been mixed. Unlike portfolio flows, real money is driven by a supportive ecosystem, business cycles, reforms landscape and growth prospects. Fresh investments typically slow ahead of elections, with a positive and clear verdict likely to draw stronger investment interests.

Equity markets

Tracking the benchmark equity gauge SENSEX, the index usually rises three quarters prior to the election quarter, flatlining a quarter after, before correcting down. These movements likely point to the tendency for investors to factor in a favourable elections outcome and reap profits after the final verdict. Consider also the broader risk environment and other domestic factors around the same period.

Currency movements

In the past, the rupee tended to appreciate three quarters before the election, extending the rally for a quarter after, before stabilising/weakening. Just like portfolio flows, the currency gains ahead of the elections is due to anticipation of a favourable outcome, beyond which the currency loses momentum and remains rangebound. On average, the rupee appreciates ~100bps over a quarter, post-elections. Like risk-sensitive flows, the broader risk environment also influences the rupee, with the currency experiencing a sharp rally soon after the 2009 crisis abated, and policymakers stepped up support.

Always be in the know, however the market moves.

Get In Touch