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India and Economic Policy Making: Do Election Results Really Matter?

In Emerging Markets, political stability and continuity of Government policy is very important for the direction of indices. In this respect, India has been relatively stable over years with democracy taking deep roots and despite changes in political parties which enjoyed power, the Government policy has remained largely consistent. India embarked on a journey of opening up the economy in 1991 with the Congress Government led by Prime Minister, P V Narasimha Rao and Finance Minister, Manmohan Singh launching major economic reforms.

It has been a matter of great satisfaction for investors in Indian markets that broad contours of economic policies over last three decades have changed for better. There have been at times “two steps forward and one step back” and not so much of desired progress in key areas like labor reforms and regulations for land acquisition and usage which is frustrating for investors and markets but we need to appreciate that political compulsions play a much bigger role in a democratic country like India. So while this remained as an irritant, it has not really impacted the attractiveness of India as an investment destination.

Does this mean that elections are irrelevant and unnecessary distraction for markets? No, Not really. There have been at times unexpected results and that implied major reaction from investors. In the recent past, the Indian election of 2004 is a prime example of this phenomenon. The general expectation of market was that Bharatiya Janata Party (BJP) which is considered more business friendly will return to power and Atal Bihari Vajpayee will be the Prime Minister again. However, the results surprised the political pundits and Congress defeated BJP and formed the Government.

Naturally, there was a fall out in the Markets as well and major indices reacted in sharp negative manner. But, what happened afterwards is much more interesting. As markets recovered from this shock, the middle of 2004 proved to be the best time for investors and in a short span of three months, Indian indices went up by 50%. There were many stocks where investors made a lot of money as they doubled or even tripled. It was a clear proof that excessive negative reaction of investors to a political event was unjustified as long as economic policies remained stable.

In 2019, Prime Minister Modi is expected to make a comeback and if that happens, market will be more relieved than exuberant. It can be claimed that people are backing Modi because they seem him as clean and honest politician who is making a sincere effort to clean the economy. From investors’ perspective, more than his victory what will important is what the Government focuses on and what their priorities are.

In his first term, Prime Minister’s political power has been unchallenged and it will increase further in his second term. But, will he deliver on the promise and what investors will be looking for?

Research Team
EM Alpha LLC

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About EMAlpha:

EMAlpha, a data analytics and investment management firm focused on making Emerging Markets (EMs) accessible to global investors and unlocking EM investing using machines. EMAlpha’s focus is on Unstructured Data as the EMs are particularly susceptible to swings in news flow driven investor sentiment. We use thoroughly researched machine learning tools to track evolving sentiment specifically towards EMs and EMAlpha pays special attention to the timely measurement of news sentiment for investors as these markets can be finicky and sentiment can be capricious.Our team members have deep expertise in research and trading in multiple Emerging Markets and EMAlpha’s collaborative approach to combining machine learning tools with a fundamental approach help us understand these markets better.

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