 "Are coalition governments bad for the markets? Not necessarily; here is why")
A coalition government may not be necessarily bad for the stock markets, said analysts, who suggest the governments need to lay down a clear actionable roadmap for its term.
While market sentiment will no doubt take a sharp hit in the event of a change in government or a weak coalition, analysts said, it’s important to remind ourselves that there are many good things going for India that are independent of the government of the day.
"These include good demographics, an educated population segment, a large domestic market, the cumulative impact of past reforms, coupled with global push factors such as supply chain diversification and the surge in digitalisation. This is not to say that policy shifts will not have an impact, but it’s certainly to say that we should not swing too far in either direction in longer-term assessments," said analysts at MUFG, a Japan-based research house.
Market scenarios
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Those at UBS, too, in case of a weakened BJP-led coalition, the reform momentum is likely to remain broadly similar, but some tough policies may not progress and/or are likely to be put on hold (including disinvestment, a land bill and a uniform civil code). However, comfort about fiscal discipline could be less of a concern for investors in this scenario.
On the other hand, in a scenario where INDIA block forms a weak coalition government, the economic policy approach would be largely aligned, but markets could have concerns about fiscal discipline and a less decisive government, leading to lags in implementing supply-side reforms.
“There could also be a delay in the private corporate capex recovery due to weaker business confidence caused by the surprise political outcome,” they said in a recent note.
What is a coalition government?
A coalition government is formed when various political parties form a power-sharing agreement with a chosen representative amongst them at the helm. Typically, such coalition governments are formed when any single party is unable to secure a complete majority to form a government, either at the state level or at the national / country level.
What are the types of coalition governments?
Minority coalitions and surplus majority coalition governments are the two main forms of a coalition government. A surplus majority coalition government is when one political party controls more than the absolute majority of seats in the parliament, which is necessary to have a majority in the government. On the other hand, minority coalition governments do not hold the majority of legislative seats.
What is the history of coalition governments in India?
The first coalition government in India was formed way back in 1977 with Morarji Desai of as the Prime Minister. The 1980s and the 1990s era saw a number of coalition governments in India with VP Singh, Chandra Shekhar, Inder Kumar Gujaral and HD Deve Gowda assuming the role of India's Prime Minister at various pints in time.
What has been the stock market performance under coalition governments in India?
A coalition government has not always been a bad for the stock markets. Data from PMIndia.gov.in suggests that the Sensex returned 95.6 per cent under the coalition government headed by VP Singh as the Prime Minister in between December 2, 1989 and October 10, 1990.
Sensex returns
The best performance of the Indian stock market in a coalition government rule was under Prime Minister Manmohan Singh, who headed the United Progressive Alliance-1 (UPA-1) between May 22, 2004 and May 22, 2009. The Sensex surged a massive 179.9 per cent during this period, shows data from PMIndia.gov.in.
Under UPA-2, the Sensex logged a gain of 78 per cent, while the Nifty zoomed 73.6 per cent.
The National Democratic Alliance (NDA) with Narendra Modi as the Prime Minister saw the Sensex gain 61 per cent between 2014 till 2019, shows data.