ExplainSpeaking | Soaring Sensex, Growing GDP: Do economic gains portend electoral victories

On December 3, the BJP recorded resounding victories in straight fights in three major states against the Congress, its main rival at the national level.

The following day, stock markets hit all-time highs, and rose higher on Tuesday. The BSE Sensex has now gone up by nearly 2000 points in two days to 69,296.

The dominant argument linking these three developments is as follows: The upside surprise on GDP numbers and the BJP’s Assembly election victories have reassured stock market investors, both domestic and foreign, that India will continue to have both political and policy stability.

In other words, there is little danger of fiscal populism or any other adventurous policy move by the central government in the last few months of its current tenure.

Many also believe that these developments almost guarantee the BJP’s victory in the Lok Sabha election next year. But others argue that 2024 remains an open question.

While it does sound reasonable to infer that faster GDP growth would help an incumbent government win re-election, is there any evidence that this is true? Similarly, do higher returns in the stock markets portend election victories for the incumbent?

Growth and LS elections

Chart 1 (below) maps India’s GDP growth rate since 1991, when the Indian economy and policy framework underwent a structural change from a centrally-planned economy to a liberalised one.

The hypothesis of higher growth correlating with victory for the incumbent would assume a rising graph ahead of elections. It follows that a falling graph would foretell defeat for the party in power.

However, that is very often not the case.

The first elections after the economic reforms were held in May 1996. India’s GDP growth rate had seen an almost secular increase — that is, the economy was not only growing each year, but growing faster with each passing year. However, the Congress government failed to win re-election.

The new Lok Sabha lasted for just over two years, and saw three Prime Ministers — Atal Bihari Vajpayee, H D Deve Gowda, and I K Gujral. GDP growth faltered during this period — and Gujral’s coalition failed to return to power in 1998.

Chart 1 and 2.

Between March 1998 and October 1999, India saw two more Lok Sabhas and two victories for the BJP-led National Democratic Alliance. This was also a time when India’s GDP growth rate trended upward again. Growth did slump immediately after the 1999 election, but by the time the 2004 Lok Sabha election arrived, the national GDP growth rate had started to climb again. However, contrary to expectations, the NDA, which hoped to cash in on “India Shining”, failed to win re-election.

On the other hand, the 2009 elections, despite a sharp slump in the GDP growth rate — thanks largely to the Global Financial Crisis — saw Manmohan Singh’s UPA return to power.

In 2014, this logic flipped again — even though the GDP growth rate had started rising in the second half of Singh’s second term, the UPA was decimated.

2019 saw a repeat of 2009. India’s GDP growth rate fell sharply through the second half of Prime Minister Narendra Modi’s first term — it was essentially a domestic slowdown, not one triggered by global events. But Modi won re-election with even more seats than in 2014.

The takeaway: by itself, robust GDP growth is not a guarantee for re-election in India. Over the past three decades, there have been more instances when incumbents have lost even as GDP growth rates have improved.

Sensex and LS elections

Before looking at the data, it is important to note that unlike the GDP, the movement of the Sensex is not a measure of widespread economic conditions in the country. The Sensex is an index of the 30 most traded company stocks at the BSE, earlier known as the Bombay Stock Exchange.

Even though it is arguably the benchmark index for how companies are faring in India, the movement of the Sensex does not have a direct bearing on the common man — at least not unless he holds stocks listed on the index. In that sense, the Sensex (or any stock market index) is like a movie theatre — if you have a ticket, you enjoy the show; if you don’t, you have to make do with just looking at the film’s posters (or hearing news of the Sensex going up).

The movement of the stock market does show if investors feel buoyant about the prospects of the listed companies. But returns generated by the Sensex in any particular year may or may not have anything to do with the broader economic performance of the country.

In the 2020-21 Covid year, when the Indian economy went into a technical recession, the Sensex generated annual returns of almost 70%. For perspective, both money kept in a savings bank account and the inflation rate were between 4% and 6% during this period.

Chart 2 maps the annual returns generated by the Sensex over the years.

It shows there is no relationship between election results and the performance of the Sensex in the preceding year. If anything, on most occasions, a good year of annual returns has been followed by defeat for the incumbent government.

On only two occasions since 1991 has the performance of the Sensex and the incumbent government moved in the same direction.

One, in 1996, the Congress-led government of P V Narasimha Rao lost immediately after the Sensex yielded negative returns of almost 15% in 1994-95. Two, in 2019, when the Modi-led NDA won after the Sensex returned over 17% annual returns in 2018.

Ahead of Bill Clinton’s successful 1992 presidential campaign in the United States, his campaign strategist James Carville is reported to have said, “It’s the economy, stupid.” Carville was exhorting his volunteers to remind voters of the almost recession-like economic conditions under incumbent President George H W Bush.

In India’s case, it would seem more like it’s (almost) never the economy, stupid!