Election Economics

Dec 07 2013, 02:43 IST
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SummaryThe over-riding sentiment is that the economy will pick up after the next Lok Sabha election

The over-riding sentiment is that the economy will pick up after the next Lok Sabha election, just a few months away. Past data show evidence of growth picking up after the polls as political uncertainty ebbs and investment sentiments improve. Inflation rates tend to decline before elections because the government tries to create favourable economic outcomes in the lead up to an election and, subsequently, after the polls, prices tend to rise.

The Indian rupee tends to depreciate against the dollar before elections because of the uncertainty among foreign institutional investors. However, within three quarters of the polls, the rupee appreciates by about 3% on an average and creates a favourable balance of payments situation. A Deutsche Bank analysis shows that within three quarters of an election, GDP growth rises by as much as 100 basis points (bps) and inflation tends to rise by 100-150 bps after the polls.

In the run-up to the previous two general elections, there was a considerable build-up of infrastructure orders, particularly in the power sector. However, the investment cycle in the run-up to the current election cycle has been weak and there are fewer outstanding projects to be pushed ahead of the next yearís general elections.

While elections donít affect the direction of the market, the impact of election results is generally neutral-to-positive for the market. A stable and competent government will certainly improve business confidence and support fresh investments, but the recovery is likely to be slow because the investment cycle will need more time to pick up.

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