What’s with this “political uncertainty”?

Most market commentators. when asked about the possible direction of the market in the near term, hide behind the excuse that “political uncertainty” leading up to the general elections will lead to subdued market performance. Almost as if it was not the job of the market to deal with uncertainty and make decisions in the absence of perfect information.

In any case, it appears that we are headed for another government comprising several political parties. Should an investor worry?



A look at the graph above indicates that the Indian economy left its earlier slower growth trajectory and embarked on a higher growth path somewhere in the decade of the 1980’s. This coincided with a drop in the vote share of the Congress – till then the single largest party with a dominant share of Parliamentary seats. The 1977 experiment at coalition was a miserable failure and led to a resurgence of the Congress. But only for a few years. For the last almost two decades, we have had minority governments ruling India. Over the same period, we have sustained a new and higher growth trajectory.





In fact, it would almost suggest, that the emergence of regional parties helped to increase the growth rate for the nation. A research paper on the “Politics of Infrastructure Spending” by Wilkinson 2006 mentions the following

“Experience since the late 1980s has shown that coalition governments are formed and held together by the judicious spreading around of loans, grants and subsidies, which obviously limits the resources available to be spent on other projects. .. For example from 1999-2002 Andhra Pradesh got $763 million in “additional central assistance for externally aided projects in state plans” because of the influence of its governing Telegu Desam Party, the single most important coalition partner in the national NDA coalition government in new Delhi. The opposition controlled state of Bihar got only a tenth as much, despite a greater population and much worst absolute levels of poverty. However when a Congress-coalition replaced the NDA in 2004, it was Bihar’s turn to benefit from electing large numbers of MPs to a key coalition party, the RJD”

What does this mean for the investor? Clearly, the election process cannot be blamed for uncertainty (it is certain that we will have a coalition government), nor for lower growth. The moot point though is whether growth is in itself needed for stock market performance. A paper by Prof Prabirjit Sarkar of Jadavpur University titled “Stock Market Development, Capital Accumulation and Growth in India since 1950” has this as its abstract:

“This study examines whether there exists a long-term relationship between Indian share price movements and growth through capital accumulation over more than half a century period since 1951. Using the Autoregressive Distributive Lag (ARDL) approach to cointegration developed by Pesaran and Shin, our study shows that no long-term relationship exists between the gross-fixed capital formation (total as well as private) as percentage of GDP and nominal or real share price. There is also no relationship between the growth rate and share prices (both nominal and real). There is also no relationship if we consider the growth rates in share price.”

Now that is a different existential question we need to confront!