Explained: How Sensex fared under single party governments, coalitions

Updated: Mar 18, 2019 7:01 AM

Both highest and lowest returns are under coalition governments. But under three of the four single party governments, rate of return has grown more than the 39-year average of 19.3%.

BSE-30 Index returns are independent of which government is in power (Illustration: Shyam Kumar Prasad)BSE-30 Index returns are independent of which government is in power (Illustration: Shyam Kumar Prasad)

Source: Quantum Mutual Fund

In 2004, when the BJP-led NDA coalition lost the elections in a shock result, the BSE-30 Index collapsed from 5,358 on May 12, 2004 to 4,961 on May 21, 2004, a loss of 7.4 % in seven days. When the UPA-2 was re-elected by a wider-than-expected majority in the May 2009 elections the stock markets surged by 17.2% in one day on May 18, 2009. Trading was halted three times that day as the market hit 3 upper-limit circuit breakers during that truncated trading day. There was less than 90 seconds of actual trading on that day!

On May 16, 2014 as the BJP’s historic victory under Narendra Modi was being reported, the market surged to a strong opening and finally closed with a gain of 1.1%. So, yes, election results can move markets but elections don’t impact your portfolio over the long run.

Ignore the noise
The heat and dust which encompasses the campaigning season and then dies down is a reason for our conviction that elections do not matter to your investments. Irrespective of whether the government in power is a single party or a coalition, the rate of growth in the Indian economy has averaged 6.3% per annum since 1980, after removing the impact of inflation. On adding the impact of an approximate 6.5% increase in prices every year, economic growth is nearly 13% every year for 39 years. If the output of all economic activity in India was 100 in 1980, it is about 11,000 today. If impact of price rise is removed, then economic activity has grown from 100 to 1,100 – by 11x.

During these 39 years, three of the 10 have been single party governments. During the reign of these single-party majority governments, Indian economy has seen growth rates of:
(a) 5.9% during January 1980 to October 1984 rule of Congress under Indira Gandhi.
(b) 5.4% during the November 1984 to December 1989 rule of the Congress under Rajiv Gandhi.
(c) 5.2% during the July 1991 to May 1996 rule of the Congress government under Narasimha Rao.

When the seven coalitions were in power, the economy grew by more than the growth rate achieved by the three single-party governments for six of the coalition governments. All periods, barring the period from December 1989 to June 1991 when India was ruled by two successive coalition governments led by VP Singh and Chandra Shekhar, saw coalition governments ensure that growth was higher than that under single party governments.

The rate of growth in the economy under the Modi-led BJP government is reported as 7.4% per annum. So, four out of four single-party governments delivered lower economic growth than the long term average of 6.3% per annum and three out of six coalitions delivered a higher rate of economic growth than the long term average of 6.3% per annum.

Elections and markets
So, while this is all about the rate of growth in the economy, what does the data tell us? Well, the BSE-30 Index was 118 on January 1, 1980. As of December 31, 2018 it was 36,068. The BSE-30 Index has increased by 305x over this 39 years. The economy, over that similar time period, grew from 100 in 1980 to about 11,000 today (adding in inflation) —so an increase of 110x.

The returns of the BSE-30 Index are completely independent of which kind of government is in power! The highest returns from the BSE-30 Index are under coalition governments—and the lowest returns are also under coalition governments. But it is also true that under three of the four single party governments, the rate of return from an investment in the BSE-30 Index has grown more than the 39-year average of 19.3%.

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