India’s economy and markets around elections

As India heads to a major election, will the economy and markets be impacted? We look at the data from 1999 to present to see if there is a political business cycle.
Taimur Baig, Radhika Rao28 Feb 2019
  • Resumption in the India-Pakistan border tensions comes at a tricky time for both countries
  • We analyse the impact of elections on the Indian economy and markets through an event study format
  • Growth tends to pick up after an election, capital flows rise as well
  • Slight fiscal slippage occurs around elections; equities tend of give up gains in the aftermath
  • INR tends to appreciate, extending the rally for a quarter after, before turning stable-to-weaker
Photo credit: AFP Photo


• Resumption in the India-Pakistan border tensions comes at a tricky time for both countries
• India heads into elections, while Pakistan’s economy is on a weak footing
• India will hold the world’s largest elections in April-May 2019, with over 800mn citizens casting their votes for the lower house of Parliament, the Lok Sabha
• We analyse the impact of the elections on the economy through an event study framework
• Growth, on average, slows a quarter before the elections but rises subsequently, by an average of ~200-250bps
• Fiscal slippage occurs in the year of/succeeding the election, but the magnitude is slight
• Inflation tends to pick up post elections. However, price dynamics are quite benign this time, easing our concern on this issue
• Foreign portfolio flow improves in the three quarters after the elections
• Equities rise prior to the election but pull back thereafter. Apart from earnings and valuation, the global environment is also a big influence on these trends
• The rupee tends to appreciate before elections, extending the rally for a quarter after, before turning stable-to-weaker

India’s lower house elections, slated for April/May, is a herculean undertaking. Over 800 million people will cast their votes across 29 states and 7 union territories, electing 543 members, with the majority party or alliance forming a government to lead the world’s largest democracy for the next five years.

This year’s election comes at a critical juncture for the economy. Despite some reforms, a welcome improvement in the business climate, and a discernible decline in governance lapses, growth has been lacklustre, the savings-investment gap remains large, external vulnerabilities loom against an improved but still modest buffer to absorb shocks, and financial sector stress remains high. For the BJP-led NDA alliance, it remains an election to lose, as Prime Minister Modi continues to govern with strength and has considerable popularity, but a recent spate of state election setbacks and some fledgling governance scandals have dented the aura of inevitability from the elections. A spike in political tensions vis-à-vis Pakistan is another complicating factor.

Without getting into the art of predicting the election outcome, we delve into what could one expect from India’s economy and markets around this pivotal event. We examine what tends to happen to growth, fiscal, inflation, investment flows, stocks, and the rupee in the quarters prior and subsequent to general elections in India. This event study approach allows us to discern any macro regularities or peculiarities associated with the election cycle.

For this study, we take stock of the four lower house elections since 1999. These elections took place under varying domestic and external conditions, and the outcomes were sometimes surprising and sometimes not. Averaging the outcome of such disparate events is therefore not sufficient; one needs to account for the volatility around the data. Our event study charts therefore contain 1 standard deviation bands around the mean of the variables under observation.

Source: CEIC, data transformations by DBS Group Research

Source: CEIC, data transformations are by DBS Group Research

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Taimur Baig, Ph.D.

Chief Economist - G3 & Asia

Radhika Rao

Economist – India, Thailand & Eurozone

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