Documente Academic
Documente Profesional
Documente Cultură
Authored by:
Aagam Lodaria: D01
Guided By:
Prof. Vandana Bharadi
Table of contents
Abstract 1
Introduction 1
Review Literature 1
Hypothesis 2
Fiscal Deficit 3
Stock Market 4
Inflation 6
Real Estate 8
Conclusion 9
Abstract
The report explains the impact of election on different economic variables like fiscal deficit, inflation,
stock exchange and real estate market, these variables are important elements of the economy for a
developing country like India and hence by analyzing the impact of election on these variables we can
broadly study the impact of election on the economy at large. We have found that there is no particular
pattern in these variables before and after election.
Before 2000, India was going through various ups and downs in the economic growth in addition to major
political changes happening in the country. India faces at least one state election every year and that can
be a reason for the non-existence of any political business cycle or political budget cycle in the economy
Introduction
Political budget cycles theories indicate that macroeconomic variables like output, unemployment,
inflation show a particular pattern during the election year1 . In India also, we can see political parties
change their stances a lot to lure the voters for their benefits. In the Sensex data plot from 1979, we can
see that a year before an election, Sensex surges almost all the election periods except for 1998 elections.
This trend could be attributed to the fact that investors were afraid of the possibility of coalition
government causing the policy paralysis. There is also an observable pattern in the Sensex performance
for the post-election years. Except for 1999, Sensex always surged up after the elections happened. That
exception might be there because earlier Atal Bihari Vajpayee led coalition government failed to get
confidence vote because of allied parties removed the support in between. Investors were still not sure
that government will last for 5 years.
For the Exchange rate for USD, there is no particular pattern found before or after the elections. Exchange
rate has been changing continuously over the years as India’s imports are increasing very fast as
compared to exports which have been increasing slowly. Government policies rarely have affected the
exchange rate changes.
In India, CPI data from 1958 does not give any particular pattern in terms of increase or decrease before
and after the elections, but mostly inflation decreases pre-election year. There have been many theories
which suggest that inflation increase before the elections. Government increases its spending pre-election
year, which specially affects inflation in the manufacturing products. But government controls the
inflation in primary articles which affects the common man directly to indicate that they are efficient. In
India, Government generally spends money on the schemes that directly benefit to the people. Because of
illiteracy, government doesn’t spend money on capital investment. But since people are becoming more
and more aware government has to think long term before the elections.
Review Literature
[Bhattacharya, Et-al,2014] observed in his research paper that the Indian economy typically slows down
ahead of Lok Sabha elections even as government intervention turns opportunistic. A study shows that
over the past 30 years the economic activity lost pace every time there was a general election. He found
that an increase in the government spending led to an increase in fuel prices leading to inflation. He said
that there exists a trend showing slowdown in investing activities because Investors and businessmen
postpone key decisions till a new government is formed, and wait to gauge what the future policy
environment will be before launching major projects. He concluded in his findings that as government
spending increases, aggregate demand increases leading to an increase in interest rates. This in-turn
His study will help investors to invest cautiously and act as guidance on their investment decision around
the elections. His research concludes that an individual Election has maximum impact (positive or
negative) in the short-term, which diminishes in the medium-term and further reduces in the long-term in
comparison to the pre-Election period.
[Chauvet, Et-al,2009] in his research explored the impact of elections on economic policies and governance
in developing countries. It distinguishes between a structural effect, which increases accountability and a
cyclical effect which may be disruptive. His paper implements an econometric analysis on more than 80
developing countries and finds that both cyclical and structural effects matter. The cyclical effect
suggests that mid-term is the best moment for policy change. It investigates structural effect by
comparing afferent frequencies of elections. A reasonable interpretation of the results is that honest
elections increase accountability and thereby discipline governments to improve economic policy and
governance, but that if candidates win by fraud this chain can be broken.
Hypothesis
Economic variables under study
H1 Fiscal deficit
H2 Inflation
Election
H3 Stock indices
H4 Real estate
A steep rise in inflation was seen in the year 1977 because of the government spending in the agricultural
sector in the previous year. This increase in production was due to the government immunization to the
farmers in the districts of Punjab, Bihar and Assam in the form of various subsidies and loan waivers.
Such public favored spending are often seen in the year before the election specially in the years of 1980,
1984, 1989 where there was a spending in the agricultural sector and schemes to support small businesses
were launchedin the form of tax benefits so as to bargain the votes in favor of the existing ruling party.
This leads to a decrease in government revenue in compare to its expenditure and hence increases the
fiscal deficit.
In the years of 1991 and 1996 a decrease in fiscal deficit is seen pertaining to an internal unrest in the
economy, the then government proved to be ineffective and public had lost its trust in the government and
the declaration of emergency worsened it.In the following years of 1998 and 1999 the deficit is seen
rising again, this is mainly due to the fact that liberalization and globalization had taken a wave and the
government had spent money before election once again to bargain for votes in the period of boom.
Subsidies were given to farmers, money was spent on education and defense sector and tax benefits were
given to upcoming businesses and industries. All these efforts increase as the term of the present
government comes towards an end and fresh elections are approaching.
In 2004 the deficit is seen dropping, this is mainly due to ‘the dot com bubble burst’, the government
companies and industries itself suffered and a hawkish stance was maintained by the government, tax
collections were increased and changes in the laws were made for better regulation. 2009 and 2014 have
seen an increase in the fiscal deficit pertaining to very attractive interim budgets released by the
government and a decent aid given to the education, defense and the agricultural sector.
Looking at the trend in the deficit in the pre-election years, we can say that there was an increase in the
deficit in most of the years pertaining to heavy government spending on various sectors for vote bargain
in their favor. This is an effect of election majorly, this fact is supported by a decent fall in the deficit
every year post elections. However we also see many years where the trend is not followed but that is due
to happening of some uncertain events hence we do not take them into consideration and based on the rest
of the fact we conclude that a political business cycle exists(PBC) in concern with the fiscal deficit.
In the recent scenarios, stock market has turned to be more “Fundamental” than “Technical”.
Referring to history and past data’s, whenever there is anything big to happen the stock market will go up
or down based on people’s assumptions. And once the event happens, market stabilizes with time. Effect
of election on market is significant.
Tabel 1.
The above table shows the movement in Sensex (in terms of returns) post-election phase. In 2004, on the
day of Result, market rose by 0.4%, since election and its effects follows a slow process not much of a
change on the day of result is seen. However, in 2004, NDA won the elections, but due to high rate of
corruption and lot of political disturbance due to congress party, market had fallen by 19.1% just after 2
sessions and continued to give negative returns till the end of the month. Looking at the last election in
which BJP won with majority and due to optimistic Indian citizens about the result, market rose bby 1.1%
on the result day itself and kept on rising at a very fast pace. By the end of 6 months market gave a record
return, increasing by 16.5%. It shows that BJP proved to be a driving force with its policy which led to
new highs in SENSEX and NIFTY indices.
Year
Preceding
Election Year Sensex Sensex Growth
Election
Year
The above table shows the changes of the market. It can be clearly seen that 75% times market have
rallied in the post-election phase. So it can be generally said that election does rally stock markets. The
above table shows the history, which showing us a positive sign for the markets in the upcoming period.
The 2019 election period is near and one can easily expect the rally considering past data. The rally might
be a short run rally where short term buying and selling could be beneficial. But if you are long-term
investor then you should analyze election impacts well.
Let’s shed some light on the possible impact of the 2019 general elections on the stock market
Even looking at the present day scenario, election is to be conducted in the mid April,2019.
As the Election Commission of India announces the dates of election for 2019, a day after SENSEX
jumps 250 points. Market seems to be more optimistic about Prime Minister Mr. Narendra Modi led
government coming back to power after the elections 2019. The Nifty 50 has posted positive returns –
averaging 6.1 per cent – in March and April in eight of the past 10 years, according to data compiled by
IDFC Securities.
A historical analysis of inflation cycles in India suggests that average inflation tends to be higher in the
last two years leading up to a Lok Sabha election. A study of key economic variables over the past 30
years shows that economic activity lost pace significantly every time there was a general election.
For this project, I’ve taken into account the data ranging from election years 1984-2014. I have tried to
recognize a pattern in the inflation volatility from the pre-election and post-election data by segregating
the data year wise. Figure 6 displays the same for the election years till 2014.
The year 1984: Rajiv Gandhi government started taking steps towards a more liberalized economy.
These reforms and policy changes towards the pre-election period in 1984 attracted a lot of investors .But
due to the sudden death of Indira Gandhi led to this election, we cannot surely predict any effects of
elections on the economy and hence a political business cycle.
The year 1991: Inflation rose and touched its peak due to low agricultural output in 1990-91.Then,
inflation reduced a bit in 1991-92 due to good agricultural production. Due to the BOP crisis, the new
government wasn’t able to import as it resulted in high inflation. But new government took lot of new
measures to control the situation. P Narasimha Rao government was able to reduce the deficit and
inflation with its policy measure.Less agricultural output and BOP crisis impeded previous government
from controlling inflation.
The year 1996: During this election, there were not many external influencing factors to affect the
economy. During the 1996 elections, previous government may have taken a lot of measures for the vote-
bank but the figures don’t agree.Maybe, the political business cycle effect was overshadowed by the
economic growth due to various policy measures taken in the fields of foreign investment, trade policy
and industrial delicensing.
The year 1998: Asian crisis was the reason for many economic changes in India. Inflation was suddenly
decreased after the election which may have been the effect of new government’s strict measures to
control the economy. This election gives a few hints towards a political business cycle existence, as
deficit and inflation was high in pre-election year, which reduced after the elections.
The year 1999: The NDA government led by Atal Biharee Vajpayee couldn’t sustain for long and was
only ruling for about 13 months before AIADMK removed their support from the government. They
didn’t get much time to change their policy to allure the voters.But again, when the new government was
formed and took action, certain measures were taken to improve the economic conditions. This election
doesn’t show any political business cycle existence.
The year 2004: This phase witnessed one of the highest growth for India as for the first time non
congress government completed 5 years of their term. During first year of congress government headed
by Dr. Manmohan Singh, the market was booming due to major technological advancement.The inflation
data indicates the existence of political business cycle.
The year 2009: This election was marked by the the global financial crisis. Many economic factors were
affected by this recession. Before the election, MSP for agricultural produce was increased, waiving off
the famers’ loans which increased the inflation.Government was pouring money into the markets and
hence there was high fiscal deficit and high inflation.
By looking at the overall data, we can see that in most cases the inflation data shows exactly opposite
effects and the data does not go with the flow of a business or a political cycle.
So we can conclude that the impact of elections on inflation is a short term one. The real factors
which create an effect are economic reforms, external markets, policies and stability.
Developers generally refrain from launching new projects until the general elections results are in. This is
due to the uncertainties that developers may face related to the timeliness of regulatory approvals for
projects. While the polls might not substantially impact property prices, they could slow down policy
clearances and infrastructure projects critical to real estate.
The Real Estate sector will remain soft or sluggish as we approach 2019 general election. In previous
election years, the market has traditionally remained soft in the run up to the election. In 2014, we
witnessed a slowdown in the number of launches pre-election largely driven by the uncertainty of policy
changes from a newly elected Government. Developers focused on selling existing inventory, often
offering heavy discounts to offset the drop in sales due to the absence of new launches.
Indian Real Estate is still coping with the reforms that have been enacted recently, specifically RERA.
The impact from these reforms are so large that they will overshadow the short-term pre and post-election
effects that we have witnessed in the past election years. Additionally, Institutional Investors that lend
liquidity to development projects might get a bit cautious during the run up to the election, which has
been the case historically with most elections. This will lead to a slowdown on the supply side over the
next few months.
Data from the project tracking database of the Centre for Monitoring Indian Economy (CMIE) show that
over the past two decades, real estate launches have declined in each pre-election year.
A 2014 research paper authored by Brandice Canes-Wrone of Princeton University and Jee-Kwang Park
of Nazarbayev University uses evidence from the US housing market to argue that policy uncertainty
generated by elections leads people to delay investments that entail high costs of reversal, resulting in pre-
election declines in sectors such as real estate.
In conclusion, it can be said that there is a slump in demand as well as supply in the real estate market as
developers refrain by making investments in new projects and buyers delay purchase of new properties in
anticipation of policy changes after the formation of new government.
Conclusion
From the above research we can conclude that fiscal deficit rises in the election year as governments tend
to indulge in populist schemes that require huge government investments in order to garner votes in the
coming elections. On the other hand inflation in an economy is influenced by factors such as production
and the rate structure set by the central bank and hence is not influenced greatly by elections, however
governments may always hope to keep inflation as low as possible during the election period. During the
run up to elections it can be noted that stock markets remain stagnant and Foreign Institutional Investment
(FIIs) remain low as investors are apprehensive about the outcome of elections and the possible policy
changes by the next government. On the real estate front, both the demand and supply of properties
remain low as developers are hesitant to invest in any new projects and buyers wait for the new
government to be formed in anticipation of new policies favorable for the buyers.