Report on Impact of General

Elections on the Market

30-05-2024

Guided by: Mr. Anirudh Sharma

Contributed by:
Nandini Rathi
Mitali Gupta
Iffat Fatma Qazi
Harshdeep Kale
Suvrat Jain
Prerna Sharma
Shruti Gupta
1
 INDEX

Sr. No. Content Page No.

1 Introduction 3
2 Elections of 1991 4
3 Election of 1996 5
4 Election of 1999 8
5 Election of 2004 9
6 Election of 2009 10
7 Election of 2014 14
8 Election of 2019 15
9 Charts and Graphs 16

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 INTRODUCTION

The relationship between political events and financial markets has long been a subject of
interest for economists, investors, and policymakers. This report delves into the multifaceted
impact of elections on the stock market, exploring how various government policies and
geopolitical conditions influence market behaviour. Spanning the period from 1991 to 2019,
our research leverages extensive data from multiple election cycles across different political
landscapes to provide a comprehensive analysis of these dynamics.
The anticipation of new leadership and potential shifts in policy direction can lead to
significant fluctuations in investor sentiment. Government policies, particularly those related
to fiscal and monetary matters, play a crucial role in shaping economic conditions and, by
extension, market performance. Changes in taxation, government spending, regulation, and
trade policies can have profound effects on corporate earnings, investor confidence, and
overall market trends. This section of the report analyses specific policy changes introduced
during different administrations and their corresponding impact on the stock market.
In an increasingly interconnected world, geopolitical conditions have a significant bearing on
financial markets. International relations, conflicts, trade negotiations, and global economic
policies can all contribute to market volatility. Our analysis includes a review of major
geopolitical events during the study period and assesses their impact on market performance,
providing a broader context for understanding the interplay between domestic elections and
global financial trends.

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ELECTIONS OF1991

PM: PV Narasimha Rao

Party: INC
Finance Minister: Dr. Manmohan Singh
Major Policy/ Events: 1991 reforms LPG

Market Condition pre-election and policy

 Before the economic reforms of 1991, India’s market conditions were characterized
by a heavily regulated and controlled economy, often referred to as the "License Raj."
 There were strict quotas and controls on production, limiting the number of goods
companies could produce and sell.
 Many key industries, such as steel, coal, and telecommunications, were dominated by
inefficient and loss-making public sector enterprises and the private sector was
restricted in its operations and growth due to heavy regulations and government
intervention.
 Industrial growth was slow, hampered by licensing, and lack of competition and the
agricultural sector lacks modernization.

Economic Crisis of 1991

 BOP Crisis
 Inflation and fiscal deficit

Reforms:
Liberalization, Privatisation, Globalization

 The liberalization of foreign investment policies allowed private sector banks such as
Axis Bank, HDFC Bank, and ICICI Bank to thrive.
 These reforms attracted international companies, leading to a surge in foreign direct
investment (FDI) that revolutionized various sectors, from automobiles with
companies like Ford and Toyota, to electronics with brands like Sony and Samsung,
and telecom with Nokia.
 The media and entertainment industry also saw substantial changes with the entry of
players like Times FM and Star Plus.
 The food and beverage sector witnessed a shift from traditional establishments like
Udupi restaurants to global fast-food chains such as McDonald's and KFC.
 Privatization enabled Indian companies to flourish, with Infosys being a prime
example. After going public in 1993, Infosys grew into a $90 billion company over
the next three decades, illustrating the dramatic impact of these economic reforms on
Indian businesses.

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1992 SCAM:
The 1992 Indian stock market scam was a market manipulation carried out by Harshad
Mehta with other bankers and politicians on the Bombay Stock Exchange. The scam was the
biggest money market scam ever committed in India, amounting to approximately ₹ 5,000
crores. The scope of the scam was so large that the net value of the stocks was higher than
the combined health and education budget of India.

IMPACT: The immediate impact was a drastic fall in share prices and market index, causing
a breakdown of the securities control system operation with the commercial banks and the
RBI.

REFORMS:
 Formation of SEBI and NSE. The SEBI was to monitor the NSE and the National
Securities Depository.
 For the equity market, the government introduced ten acts of parliament and one
constitutional amendment based upon the principles of economic reform and
legislative changes.
 The introduction of online trading by NSE changed the dynamics of stock buying and
selling. The financial market opened up nationally rather than being confined to
Bombay.

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ELECTION OF 1996

1996-1998
PM Atal Bihari Vajpayee (May 16, 1996 – June 1,
1996)
H. D. Deve Gowda (June 1, 1996 – April 21,
1997)
I. K. Gujral (April 21, 1997 – March 19, 1998):
Party United Front Coalition
Finance Minister P. Chidambaram
Major Policy/Event Asian Financial Crisis, 1997

History of 1996-1998 Election

In India's general election of 1996, no party was able to secure a resounding majority. With
161 seats, the BJP won the most, but it was unable to put together a stable administration, and
Atal Bihari Vajpayee was only prime minister for 13 days. Then, with Congress's support, the
United Front—a coalition of 13 progressive regional parties—formed a government.
This time was full of political instability, coalition governments, and efforts to continue
economic reforms despite challenges like the Asian Financial Crisis. The 1998 elections
finally brought a BJP-led coalition to power.

 Despite the political instability, the new government continued the economic
liberalization policies initiated in the early 1990s. The commitment to liberalization
and economic reforms remained a priority.
 Importance was given to infrastructural growth, the government increased
investments in critical sectors such as roads, telecommunications, and power. -Funded
the Rural Infrastructure Development Fund (RIDF)-II with Rs.2500 crore.
 Renewed focus on the agricultural sector, aiming to increase productivity and support
rural development. Initiatives included better irrigation facilities, agricultural credit,
and rural infrastructure. - Launched the Accelerated Irrigation Benefit Programme.
 Investments in education, healthcare, and poverty alleviation were emphasized to
improve the quality of life and reduce poverty levels in the country. - Provided an
additional sum of Rs.2466 crore to the States for seven Basic Minimum Services;
Introduced the Jeevan Suraksha and the Jan Arogya insurance schemes
 The government focused on further opening up the economy to foreign investment,
reducing bureaucratic red tape, and continuing privatization efforts in various sectors.

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Asian Financial Crisis, 1997

The Asian financial crisis of 1997 started in July 1997 in Thailand and spread rapidly across
East and Southeast Asian countries, resulting in serious economic disruption. Although India
was not directly affected by the crisis, it experienced significant indirect effects that affected
its financial markets and its economy.

Impact on India

 Pressure on Currency: The rupee came under pressure as investors fled emerging
markets such as India in search of safer investments, even though the country's
economy was relatively strong compared to other Asian countries. In order to support
the currency, the RBI had to raise interest rates and use the country’s foreign
exchange reserves.
 Volatility of the Stock Market: The Indian stock markets were extremely volatile,
particularly the National Stock Exchange (NSE) and the Bombay Stock Exchange
(BSE). Due to investor concerns over the crisis, the BSE Sensex experienced a
significant decline. More market volatility resulted from Foreign Institutional
Investors (FIIs) withdrawing their capital from Indian equities.
 Investor Confidence: International and local investors both lost confidence in the
situation. Investors were hesitant to place money into emerging nations, such as India,
due to concerns about the soundness of the financial systems in Asia. Consequently,
at the worst of the crisis, there was a slowdown in foreign portfolio investment (FPI)
and foreign direct investment (FDI).
 Economic Policy Reactions: To mitigate the crisis' effects, the RBI and the Indian
government implemented a number of measures. They struggled to limit government
expenditure, manage inflation, and carry out ongoing economic reforms. In order to
boost investor confidence and build the economy, they also concentrated on bolstering
the financial sector by enhancing market mechanisms and banking regulations.
 The banking and financial industry: Due to the general restriction of liquidity in
global markets as well as possible exposure to affected Asian countries, Indian banks
and financial institutions faced greater risks.
In order to guarantee liquidity in the banking system and preserve financial stability,
the government and RBI implemented measures such as keeping an eye on non-
performing assets (NPAs) and making sure banks had enough capital.

India was significantly impacted indirectly by the Asian Financial Crisis of 1997. The Indian
Rupee was under pressure even though the country's economy remained reasonably solid;
investors were looking for safer investments, which caused market instability. Foreign
investors pulled out, adding to the currency's instability when the Reserve Bank of India
intervened to stabilise it. Foreign investment slowed down as a result of the crisis's impact on
investor confidence. Nonetheless, the RBI and the Indian government took aggressive policy
steps to lessen the effects. To maintain economic resilience and increase investor confidence
in the face of global financial volatility, strengthening financial rules and infrastructure was
given top priority

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ELECTION OF 1999

PM: Atal Bihari Vajpayee

Party: BJP
Finance Minister: Yashwant Sinha

 Sensex increased 7% and rose for the next 3 months.

 NDA’s victory largely brought market stability, witnessing a rally in Sensex and an
enhanced GDP growth rate. GDP (Gross Domestic Product) growth rate reached 6-
7%.
 Govt. focus: sectoral reforms, structural changes, liberalization policies attracting FBI
and boosting the economy (causing increase in GDP, controlled inflation and
favourable market conditions)
 Global factors such as 9/11 attack and even domestic factors led to a market downfall
with stock market falling up to 50%
 Compound annual growth rate (CAGR) is a business, economics and investing
term representing the mean annualized growth rate for compounding values over a
given time period. Annual CAGR was around 3%
 Within the next two years, it fell around 50% due to domestic and global factors such
as the 9/11 attack. As a result, at the end of the NDA government tenure, the annual
compound return was just 3%, and the absolute performance was over 14%.

8
ELECTIONS OF 2004

PM: Dr. Manmohan Singh

Party: INC
Finance Minister: P. Chidambaram
Major Policies/ Events: National Rural Employment Guarantee Act (NREGA) in 2005

 After the elections of 2004 the market lost 15% in 2-3 trading sessions as the result
were not up to market sentiments.
 The nifty 50 nearly crashed 8% the next day after the elections.
 On May 17, 2004, the Bombay Stock Exchange (BSE) Sensex fell dramatically by
over 800 points, about 17%, within minutes of opening.
 Congress formed the government while the market hoped for the NDA government.
 The INC-led coalition government depended on the support of left-wing parties like
the Communist Party of India (Marxist) which made investors worried as these left-
wing parties were known for opposing economic liberalization and reforms.
 Investors were worried about potential policy changes and economic instability under
the new government.
 But, things began to turn around as investors gained confidence, as Manmohan Singh
became the Prime Minister as his previous tenure as Finance Minister in the 1990s
had been marked by significant economic reforms.
 Despite the initial shock, the Indian stock market recovered and performed well over
the following years.
 This phase was followed by a robust bull market that lasted 2007 with gdp growth
hovering around 8% and FDI reaching a record $34 billion.
 However, the global financial crisis of 2008 hampered the bull stock market but
recovery was seen soon after 2009 before the next election cycle.

The financial crisis of 2008-

1. Originated in the US due to the subprime mortgage crisis and the collapse of major
financial institutions like Lehman Brothers, Merrill Lynch and Bear Stearns caused a
global economic downturn and widespread panic in financial markets.
2. On January 21, 2008 Sensex dropped by 1408 points.
3. This day is referred to as BLACK MONDAY and the analysts attributed the fall for
the following reasons-
o Widespread fear that the US economy might go into recession.
o A drop in the interest rates in the US.
o Volatility in the commodity markets. And hedge funds selling shares from
emerging markets and investing in stable developed markets.
o A change in global investor confidence.
4. By the end of 2008, the Sensex had dropped from around 20,465 points to 9716
points.

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ELECTION OF 2009
Gross Domestic Product (GDP) Growth Rate

 2009-10: 8.6%
 2010-11: 8.9%
 2011-12: 6.7%
 2012-13: 4.5%
 2013-14: 6.9%

Inflation Rate (Consumer Price Index - CPI)

 2009-10: 12.1%
 2010-11: 10.5%
 2011-12: 8.9%
 2012-13: 10.2%
 2013-14: 9.5%

Bombay Stock Exchange (BSE) Sensex Performance

 2009-10: Surge from ~9,000 to ~17,000.

 2010-11: Fluctuated (17,000-21,000).
 2011-12: Dropped (~15,000).
 2012-13: Modest recovery (~19,000).
 2013-14: Crossed 22,000.

Foreign Direct Investment (FDI)

 2009-10: $25.8 billion

 2010-11: $27.6 billion
 2011-12: $36.5 billion
 2012-13: $22.4 billion
 2013-14: $24.3 billion

Comparison of Indian Elections Impact on Financial

Markets: 2004-2009 vs. 2009-2014
Gross Domestic Product (GDP) Growth Rate

 2004-05 to 2008-09:
o Average GDP growth: Around 8.9%
 2009-10 to 2013-14:
o Average GDP growth: Around 7.1%

Inflation Rate (Consumer Price Index - CPI)

 2004-05 to 2008-09:
o Average inflation: Approximately 5.8%
 2009-10 to 2013-14:

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 o Average inflation: Approximately 10.2%

Bombay Stock Exchange (BSE) Sensex Performance

 2004-05 to 2008-09:
o Sensex growth: Significant increase, reaching over 20,000 by the end of 2007.
 2009-10 to 2013-14:
o Sensex growth: Mixed performance with volatility, reaching around 22,000 by
the end of 2013.

Foreign Direct Investment (FDI)

 2004-05 to 2008-09:
o Average FDI: Around $20 billion per year.
 2009-10 to 2013-14:
o Average FDI: Around $27.3 billion per year.

Analysis of Comparison

GDP Growth and Inflation

 2009-2014 vs. 2004-2009:

o GDP growth during 2009-2014 period was slightly lower compared to the
previous period, while inflation was significantly higher, indicating economic
challenges such as inflationary pressures.

Stock Market Performance

 2009-2014 vs. 2004-2009:

o The Sensex performance during 2009-2014 exhibited more volatility
compared to the previous period, with mixed performance and no significant
sustained rallies.

Foreign Direct Investment (FDI)

 2009-2014 vs. 2004-2009:

o FDI during 2009-2014 increased compared to the previous period, indicating
continued investor interest despite economic challenges.

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12
May 16 .2009
Bollinger bands shrank before the election, resulting in an indication of a breakout
Confirmed by RSI
Nifty jumped from lower to higher points.

Same result for Sensex.

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ELECTION OF 2014
PM: Narendra Modi
Party: BJP
Finance Minister: Arun Jaitley
Major Policy/Events: Demonetization, Goods and Service tax

 On May 16, 2014, the day election results were announced, the Bombay Stock
Exchange (BSE) Sensex and the National Stock Exchange (NSE) Nifty reached
record highs.
 The Sensex surpassed the 25,000 marks for the first time.
 The primary reason behind this positive market response was the expectation of
economic reforms and the anticipation of a stable government under the NDA.
 Performance of Nifty50 under the rule of BJP was very positive as it provided a
return of 61.45%.
 The stock market initially viewed the announcement of demonetization to be
disruptive to the entire market.
 However, the impact lasted only for a short period for most of the sectors, and the
market recovered largely within 1 month.
 It is also noticed that sectors like financial services, IT, and Software gained from
this event while Pharmaceuticals, Power, Telecom, and Metal sectors were least
affected. We also found that most cash-dependent sectors like cement, entertainment,
industrial equipment, mining & mineral sectors were negatively impacted by the
demonetization.
 Modi government introduces the Goods and Service Tax (GST) on July 1, 2017.
 The sectoral indices were affected due to the implementation of GST. NIFTY Auto
and NIFTY Media had negative expectations from GST. This can be due to the reason
that both sectors were going to fall in higher tax brackets.
 NIFTY PSU Bank had the highest negative expectations in the pre-implementation
period. But after the implementation the expectations changed to positive. Although
the rates on banking service were increased from that in the earlier tax regime,
demonetization and government’s boost regarding move towards cashless economy
has served to create positive impact on banking sectors post GST also.
 People shifted to long-term investing because of the increase in transaction cost
(from 15 to 18%) made trading less economical.

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ELECTION OF 2019
PM: Narendra Modi
Party: BJP
Finance Minister: Nirmala Sitharaman

 After the 2019 general elections in India, the stock market experienced significant
changes, primarily influenced by the political stability and economic policies
anticipated under the re-elected government.

 Market Rally: The Sensex and Nifty indices saw a significant rally immediately after
the election results. The Sensex hit record highs, surpassing the 40,000 marks, while
the Nifty also reached new peaks. The market rally was driven by positive investor
sentiment, reflecting confidence in the continuity of economic reforms and policies.

 Initiatives like “Make in India” and strategic tax reforms characterized this period.
However, growth was constrained by global trade tensions and structural issues within
pivotal economic sectors.
 Banking, Infrastructure, consumer goods and retail showed an overall positive impact,
continued reforms gained investors’ confidence.
 In the sector of energies and utilities, there was a mixed reaction. While there were
expectations of continued reforms and investments in renewable energy, concerns
over regulatory changes and global oil prices influenced stock performance.
 The anticipation of continued economic reforms, such as tax simplification, labor law
changes, and further liberalization of the economy, contributed to sustained investor
confidence.
 Stable political condition also attracted FDI.

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CHARTS AND GRAPHS

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