After the roller coaster ride in response to the exit polls and the actual poll results, the market has stabilized and moved higher to set new records. The new reality is coalition politics, and we have a coalition government after ten years of single party majority. There is a concern among sections of investors that coalition governments are not good for the economy and the stock market. There is a concern that exigencies of coalition politics will stand in the way of economic reforms and growth. What is the reality?
If we the take recent history, during the coalition era of 2004-14, India achieved average annual GDP growth of 6.8 percent. During the single party majority government era of 2014-24 the average annual GDP growth was 6 percent. However, one should be careful in rushing to any conclusions from this. The 2004-09 period was characterized by the tailwind of high global growth which pushed up growth in all countries. The 2019-24 period was impacted by the massive GDP contraction of 5.8 percent in FY21 inflicted by the pandemic Covid-19. The important takeaway is that coalition governments can and has delivered. India’s shift to higher growth trajectory happened after the initiation of liberalization in 1991 under the leadership of Prime Minister Narasimha Rao heading a coalition government.
Now let us take the market performance. During the 25-year period from 1989 to 2014 we had coalition governments. How did the market perform? The Sensex moved up from 750 in 1989 to 25000 in 2014. If we take shorter periods, the market return during 2004-09 and 2009-14, when we had coalition governments, were 115 percent and 94 percent respectively. The returns during single party majority governments of 2014-19 and 2019-24, were 62 percent and 88 percent respectively.
The takeaway is that coalition governments can deliver growth and good market returns. Politics will influence the market in the short run and unexpected political developments can trigger high volatility. But investors should always remember that “ in the long run the market is a slave of earnings.”
There are clear indications that the Indian economy has moved to a higher growth trajectory post Covid. After the 5.8 percent GDP contraction in FY2021inflicted by Covid, Indian economy has staged a smart rebound in FY 22, FY23 and FY24 with growth rates of 9.1 percent (due to base effect), 7 percent and 8.2 percent respectively. In FY25, India is set to achieve a growth rate of around 7 percent. In brief, with 7 percent growth rate for four years in a row, India is an outlier among the large economies of the world. This impressive economic growth is translating into decent corporate earnings, too. In FY 24, Nifty 500 earnings grew by 24 percent and, around 15 percent earnings growth is achievable in FY25. More important, India is achieving this impressive growth with financial stability. This is the fundamental support to the market. The superior market performance is attracting an increasing number of domestic investors into the market and fund inflows are steadily increasing, which, in turn, is keeping the market buoyant. Barring unforeseen events, this virtuous cycle can sustain this bull market for long. But since valuations are high, sharp corrections can happen. Investors can manage volatility with systematic investment.
