State Election Results & Impact on Markets

Sanjiv Mehta  |  2018-12-14

BJP has fared poorly in the recent state elections. The article discusses the correlation with the national Lok Sabha elections just a few months away and the consequent impact on the Indian financial markets.


Election results announced on Dec 11 have been very good for the Congress party –it won all three Hindi belt states of Rajasthan, Chhattisgarh, and Madhya Pradesh while TRS won in Telangana & Mizo National Front (a BJP ally and part of NDA) in Mizoram.

Lok Sabha elections are now only a few months away, so an important question is how 2019 elections will turn out to be and its consequent impact on the financial markets.

Correlation of State Elections with Lok Sabha results

In 2003, BJP won all 3 state elections and won an impressive 56 seats out of 65 Lok Sabha seats in 2004. In 2008 state elections, BJP retained Chhattisgarh and Madhya Pradesh but lost Rajasthan and could get only 30 of 65 seats in Lok Sabha 2009. In 2013 it again won all 3 states and fell just short of 100% record-it won 62 of 65 seats in Lok Sabha 2014. Correlation seems to be quite high.

Modi Factor- can it break the correlation?

Is national leadership gaining more relevance?  One important factor is that Mr Modi’s personal popularity is still very high and his ratings are much ahead of other prime ministerial possibilities. Additionally, there is lot more awareness of national issues even in remote places because of expanding reach of TV and Social Media.  In India mobile phone ownership has grown by leaps and bounds and more and more areas are getting connected through internet.

Is Indian voter moving towards differential voting in national and state elections?  Capital city of Delhi might be showing the way- one clue is that BJP was extremely popular and had won all 7 Lok Sabha seats in 2014, just a few months later in early 2015, Aam Aadmi Party won 67 of 70 assembly seats.  Some divergence seems to be there, however it is very difficult at this stage to estimate its magnitude.

Lok Sabha 2019

It is clear that even if there is a national factor at work , there is bound to be erosion in BJP’ s share of seats.  For example, in Chhattisgarh, in all 3 previous Lok Sabha elections, BJP had won 10 out of 11 seats. Looking at the big margin of recent Congress victory, BJP will be happy even if it wins 3-4 seats there. Bigger states of Rajasthan and Madhya Pradesh have been close but maintaining the present high share will be very difficult.

Similarly, it will be a herculean task to retain 71 seats out of 80 in UP. This is made even more difficult by BJP’s opponents coming together. In a recent Lok Sabha bye election in UP, an alliance of SP & BSP defeated BJP in its stronghold of Gorakhpur. Even in Mr Modi’s home state of Gujarat, matching 2014 performance of winning all 26 seats will be not easy, recent state elections were quite close. In Maharashtra, quite a few sections including farmers are not happy and to maintain the high winning ratio will be difficult.  If we move to southern state of Karnataka, where BJP presently has 17 out of 28 seats, there is likely to be a pre Lok Sabha poll alliance of Congress and JDS- they are running the state government together as a part of post poll alliance though BJP had emerged as the largest party. Combined, they had polled 51% of votes compared to 40% of BJP.  To retain 17 seats will be difficult since BJP will not have the luxury of divided opponent votes.

Mr Modi will have to campaign very hard to stem this erosion at least to some extent, some reduction being inevitable. On its own, it will have to reach at least 210 seats as compared to 280 it won in 2014. It might be able to increase its number of seats in North-eastern States and Orissa. Its allies including JD (U) in Bihar, Akali Dal in Punjab and possibly Shiv Sena in Maharashtra will also have to contribute in a meaningful manner. Then only it can hope to get support from TRS in Telangana, YSR Congress in Andhra Pradesh and either DMK or All India Anna DMK in Tamil Nadu.

On the whole, it will be a complex, close and interesting election. NDA might have only a slightly higher probability of retaining power.  Congress will definitely improve its number of seats since by beating BJP in straight contests; it will gain the most from decrease in BJP’s share.

Impact on Indian Financial Markets

Paradoxically, Congress’s decisive victory will prove to be good for the Indian financial markets. What has now become highly improbable is a weak coalition with no leading partner coming to power. Similarly, non BJP non Congress front is a very long shot. The clear alternatives seem to be either BJP led coalition or a coalition with Congress as a core and central partner and both will be perceived to be stable. Therefore, the financial markets will not be perturbed too much by any of these two outcomes. Moreover, Indian democracy has reached a stage where sustaining a high economic growth rate has become a necessity.  If the rate goes below a certain percentage, that can lead to the ruling party losing power. Sound and sensible economic policies will continue.

Consequently, our bullish view irrespective of these results remains intact. Essentially stock market movements are related to economic growth and these are bound to go up in an economy expected to grow at 7-8% for the next 10 years. Earnings growth numbers for individual companies are expected to rise at a healthy rate. Lately, oil prices have come down and that is also good for Indian economy. USA- China trade tension showed some positive signs but another blow was dealt when CFO of Huawei was arrested. This issue will remain simmering but for the consumption led economy of India, the domestic economic conditions are far more important. GDP growth in Q2 of FY 2018-19 showed a figure of 7.1% as compared to 8.2% in Q1 but a positive factor was a steady increase in gross capital formation which gives confidence about sustained economic growth.

Overall, our recommendation for long term assets remains the same and that is to be invested in good quality equity schemes.