- India will hold the world’s largest general elections in April-May 2024.
- We analyse the impact of the elections on the economy and markets through an event study framework.
- Growth, on average, slows a quarter before the elections but rises subsequently.
- We expect the centre to stay committed to fiscal consolidation.
- Keep an eye on the ‘polycrisis’ era.
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In summary
We head into a busy election period for the country. Five states will go to the polls in November 2023 – Madhya Pradesh, Rajasthan, Telangana, Chhattisgarh, Mizoram – with results to follow on 3-December. This will be the last round of state elections before the 18th Lok Sabha (Lower house) polls in April-May 2024.
In the past cycles, the outcome of the state polls has had little bearing on the results of the general elections. States’ votes are driven by more local sensitivities rather than national issues. Nonetheless, market participants will focus on the December’s outcome to gauge broader direction for the incumbent government and opposition coalition. Early opinion polls are still mixed (anti-incumbency wave in one-two states, a close call in another) as not all major parties have announced lead candidates as yet.
In this note we delve into what one could expect from India’s economy and markets around the general elections, i.e., what tends to happen to growth, fiscal, inflation, investment flows, stocks, and the rupee in the quarters prior and subsequent to polls.
For this study, we take stock of the five lower house elections since 1999. Apart from averaging the outcome, we also 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. Highlights of the past elections are in a table in Appendix 1 (see end of the report).
In the next few sections, we discuss impact on growth, inflation, fiscal math, rupee, equity markets and portfolio flows.
In conclusion
The event study brings to fore interesting observations across the different macro indicators around past elections. We also note that the global economy has undergone and continues to face a period of concurrent ‘polycrisis’ i.e., multiple event risks which have tested the resilience of financial markets, national governments, and policymakers. This includes geopolitics, supply chain fragmentation, trade tensions and conflicts, tighter policy conditions, weather vagaries, climate transition, above-target inflation, amongst others. In this midst, domestic and global developments have become more intertwined by way of supply-side shocks (commodity price swings, trade protectionist measures, supply chain fragmentation etc.) and need for balance of payments strength, suggesting that as we head towards India’s elections in mid-2024, domestic developments will certainly matter, but global events also warrant a close watch.
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