WHY MARKETS SHOULD NOT FEAR COALITIONS

The prospect of coalition governments strikes fear into the hearts of financial markets and business houses; the premise being that coalitions, being inherently unstable, lead to policy paralysis, economic stagnation and market turmoil. As the prospect of a coalition government in 2019, BJP-led or not, becomes more realistic with every passing month, markets appear fretful. However, factual evidence based on past coalition regimes suggest that such fears are vastly overstated. This is true not just of market returns, but also of underlying economic and corporate performance.

Let’s take markets first. The five years between 2004 and 2009 belonged to UPA 1, a weak coalition with the largest party holding only 145 seats. It was even supported by the Left, the market’s worst nightmare. Yet, the Nifty rose 115% in this period, which even included the Great Financial Crisis (GFC) and the stock market crash of 2008, its best five-year return of the last two decades.

Between 2009 and 2014, the years of the deservedly maligned UPA 2, another coalition, the Nifty doubled. The second best five-year return, after UPA 1. In contrast, during the first four years of the Modi government, which evokes raptures in the market fraternity, the Nifty is up 50% with every sign of not adding much more during the rest of the government’s term. Even more interesting is the stock market’s first reaction to these election verdicts. In 2004, the Sensex plunged 8% the day after the results. The market feared the worst and ended up with the best returns in 20 years. In 2009, the Sensex jumped 20% on the day of the result; it got UPA 2, which later it could not wait to see the end of. Our markets don’t seem to be the best judges of political realities.

What about the economy at large? Here too, the evidence is unequivocal. Between 2004 and 2009, the average GDP growth was over 8%, including the GFC. Between 2009 and 2014, it was over 7.5%. The earnings of Nifty com- panies, a good benchmark of overall profitability for the corporate sector, rose at an annual average (CAGR) of 18% between 2004 and 2019 and at 10% between 2009 and 2014, the two best periods of the last 20 years. In the first four years of the Modi government, GDP growth has averaged 7.3% and Nifty earnings growth 1%.

Any economic analyst examining this data would be quick to point out that economic growth, corporate profitability and market returns in the coalition years benefitted from strong global tailwinds and other supportive factors that had little to do with government policy impetus. That is precisely the point. Today, India is joined at the hip with a global economic cycle. Within that overall global framework, its own consumer demand patterns, savings and capital investment cycles, and macroeconomic balance determines the outcome of our economy, companies and markets. The Indian penchant for larger than life heroes, while apt in its myths and lores, is entirely out of place in expectations of growth driving leadership. This is the mistake which markets make, in thinking that a majority government, led by a strong leader, is necessarily good for the economy. The data, under leaders such as Indira Gandhi and Narendra Modi, compared to their coalition counterparts, suggests otherwise. Yes, coalitions may need to deliberate more before arriving at decisions, and while that can slow down policy-making it would also deter unilateral misadventures like demonetisation. Better to be safe than sorry, as they say. India is a country with many dimensions, economic and social. Perhaps it is better to have coalitions, with their inherent checks and balances, than majority governments which can ride roughshod over interests of many segments.

Finally, there is the question of stability, which markets crave. It is true that the 1996 coalition did not last its full term. But whether a likely coalition with 125 Congress seats is less stable than one with 200 BJP seats, is an open question given how regional parties seem currently disposed. Yet, India Inc and stock markets need not worry. After all, the Indian private sector does not flourish because of the government at the Centre, but despite it.

INDIA IS A NATION WITH MANY

DIMENSIONS. IT IS BETTER TO HAVE COALITIONS THAN MAJORITY GOVERNMENTS WHICH CAN RIDE ROUGHSHOD OVER INTERESTS OF MANY