This year 2019 will be an important landmark year for the Indian economy. The General Elections are going to be held in the month of April and May 2019. There are various factors like Import and Export ratio, the value of Rupee, global oil price etc that impact the Indian economy. Like these factors, the outcome of general elections also has a significant impact on the Indian economy. Generally, based on the public sentiment, the election results have had a positive impact on the Indian economy in the last 10-15 years.
Union Budget on Election Years
One of the factors that impact the economy is the union budget that is presented by the ruling government in February every year. The difference in the presentation of the union budget during normal years and trade years is that during an election year, the government presents an Interim budget and not a full-fledged budget. During the previous elections in 2009 and 2014, the outgoing government had presented an interim budget. The next government after the elections will present the full budget in the next few months.
Hence, in an interim budget, no major financial reforms will happen and hence its impact on the market will be minimal. But based on the observations of the last few elections, the union budget presented after the elections has had a negative impact on the share market. The union budget presented in 2009 and 2014 by different regimes has had a negative impact on the share market.
Impact of 2009 Elections
In the 2009 elections, the United Progressive Alliance won the general elections and formed the government under the leadership of the Congress party. The mood before the election was that Congress might need the support of Left parties to form a government which might be unstable. But when UPA won a majority, the mood was very upbeat and both Sensex and Nifty had record gains. Both Sensex and Nifty gained over 17% and it helped to revive the economy that had plunged in 2008.
After the initial increase, when the 2009 Union Budget was presented, the market expected some measures to increase economic growth. But, when the budget was somewhat neutral, the Sensex lost close to 869 points which was the highest fall ever recorded on a budget day.
Impact of 2014 Elections
In the year 2014, the general elections were held again. The market was in a volatile state after several charges of corruption were leveled against the ruling government.
After the exit polls predicted an NDA government, the markets slowly begin to rise expecting the new government to boost the Indian economy. When the election results were announced on 16 May 2014 indicating an NDA regime with the BJP securing a majority on its own, there was a lot of positive response from investors. BSE Sensex touched a new record of 25000 during trading while Nifty also reached the 7500 mark for the 1st time.
Investors expected the new government to begin new economic reforms and bring down the trade deficit. Most of the shares in Sensex and Nifty recorded huge profits. Foreign Investors who had taken a cautious approach till that time started to invest in Indian shares. This initial growth started to stabilize after some weeks. When the union budget of 2014 was announced without any new reforms that were hugely expected, it brought a down slide for some days. The market slowly stabilized by the end of the year.
General Elections 2019
After a gap of 5 years, the general elections are going to be held again this year. This time, there is no guarantee who will come to power. The previous government got a bad name due to various scams that surfaced during their tenure while the current government has fallen short on the promises it made to improve the economy. The Union Budget 2019 is rumored to be a full budget and not an interim one like the previous election years. If it has some reforms to help farmers and increase its vote count, then it will have a negative impact on the economy as the fiscal deficit is already high. Thus, the budget will have an impact on the market before the elections.
If there is a change in government or if the government is formed with external support without any major party, then the impact will be negative on the market as a lot of key policies cannot be undertaken without support from all the parties. Then, the post-election budget will also significantly affect the market.
There have been various studies to determine the impact general elections have on the economy and the market on both long and short terms. We can see that over a short term of some days to few months, the impact is significant while if we consider a long-term action of a year or more, then the impact is very little. We can conclude that the impact of elections on the economy is mostly short-term in nature and it stabilizes as days pass.