Animal Spirits: Stock markets should not assume 2024 elections is a done deal, explains Udayan Mukherjee

While stocks seem to have shrugged off, correctly, the setback for the BJP in the recent Karnataka polls, it brought again to the fore the question of whether elections could still emerge as a potential risk for markets in 2024. This is significant because it is a raft of global factors that top the list of worries for most investors and market participants in India. Rising US interest rates, bank collapses, geopolitics and recession are among other issues that could act as speed breakers to the India growth story. As far as the domestic picture goes, investors seem pretty relaxed—decent growth, recovering capex, stable macro and steady earnings growth with only minor irritants, like El Niño or some slowdown linked to global causes, clouding an otherwise sunny outlook. But what of elections next year? Should one take the outcome for granted or could there be a surprise?

It is no secret that the stock market’s preference, by far, is the current government at the centre. This is hardly a surprise, the stock market being the ultimate capitalist institution, and capitalist institutions worldwide lean rightward. So much so that the mere whiff of Left-leaning economic policies, of which the Congress party and many of its allies are assumed to be proponents, gets market participants all flustered. The fact that a majority of stockbrokers and market intermediaries hail from Gujarat or Rajasthan—traditional Right-wing bastions—may also be a contributing factor. Thus, politically speaking, it has been a comfortable decade for the Indian stock market, the odd policy hiccup such as demonetisation notwithstanding.

While there has been a lot of noise following the Karnataka result, there is yet nothing to suggest that the government at the centre is staring at an upset. It is well established by now that electoral outcomes at the state level don’t necessarily reflect public preference for Prime Ministership, and Indian general elections have increasingly become US Presidential-style contests where non-BJP parties have failed to put up a face to counter Narendra Modi’s popularity. That fact remains and one Karnataka verdict does not change that. Having said that, investors would have noted, perhaps with some discomfort, the growing stature of Rahul Gandhi over the last year and the fact that the BJP appears somewhat nervous about the challenge he may pose this time, in his new avatar as a serious, committed politician. The state elections stacked up for the end of the year, in Madhya Pradesh, Rajasthan and Telangana, would throw up a clearer image of how serious this challenge may be.

There are many reasons why this is a significant consideration for stock market investors. First and foremost, is the assumption that majority governments are intrinsically more stable and competent than coalition governments. Investors recognise that the Congress, even if it manages to fashion a remarkable turn in its fortunes, is still very unlikely to get anywhere close to a majority in Parliament. The BJP, given its stranglehold over Uttar Pradesh, is in a much better position to get there, even if its performance slips from the 2019 level. This raises the spectre of a coalition of parties with egoistic leaders primarily focussed on extracting the maximum advantage for themselves, their parties and states—hardly ideal for the twin goals of stability and governance. Unless these non-BJP parties can convey to the electorate, in advance of the polls, that they can come together without squabbling and bickering, investors will eye their prospects with great caution.

The other major factor is that the BJP is seen as a pro-business, pro-investment party with no great sympathy for populist or pro-poor policies. Put differently, it is the Congress and some of the other regional parties which seem far more intent on supporting the lower end of the pyramid given the extreme distress faced by these sections since the pandemic. This effectively means redistribution from the segments that have been doing much better—corporates, middle- and high-income citizens and stock market investors. This would seem fair, but the mere idea is anathema to market participants. They scoff at all talk of a universal basic income safety net or of higher taxes to raise outlays for social sector schemes, dismissing them as outdated Leftist/populist policies. Hardly a surprise, as selflessness or empathy has never been the hallmark of stock market investors.

In the unlikely event of a change of regime at the centre next year, it is totally conceivable that some taxes directed at the wealthier sections of the population will go up—such as the capital gains tax on equities. With people starving in the villages, why should investors be taxed at a rate much lower than the prevailing income tax rate for the salaried class, or even fixed deposit returns for savers? There are arguments, but mostly specious. It is debatable whether stoking the animal spirit of optimism in stock buyers should take precedence over dousing the animal spirit of hunger in the poor. From all that one hears from political leaders across the spectrum, there appears to be a very fundamental difference between the BJP and the non-BJP parties on what constitutes the appropriate direction of economic policy for a country like India. And herein lies the risk for the market in 2024. It is not a mere change of government that could be at stake, but a total rethink of the blueprint—economic and social.

At this juncture, the dice is loaded towards the government in power. Yet, the gap in performance between the upper and lower segments of the population is so stark that we could be silently wading into an ‘India Shining’ kind of moment—where the ruling government remains smugly trapped into believing its narrative of high GDP growth and growing prosperity, while it only serves to feed a seething resentment in larger swathes of the population who cannot see the fruits of that in their own lives. This threat would have been far more potent if the non-BJP parties had their act together. The Congress seems to have bottomed out—to use market parlance—but one swallow does not a summer make. If they manage to win Madhya Pradesh and Rajasthan in winter, the game would truly be on. Stock market investors needn’t panic yet, but they shouldn’t be too complacent either and take 2024 as a done deal. As Lenny Kravitz sang, and as they say in cricket—it ain’t over till it’s over.