A friend analysed the exit polls on December 5 thus, on Facebook, " Anticipation of BJP win would result in stock markets going up, (leading to) disinvestments at better rates. (Then, the) Current Account Deficit, inflation, interest rates would start falling, (triggering) home buying restarts. (As the) investment climate got better - consumers and people (would become) happy (allowing the) congress (to) claim credit for a healthy economy and reduced inflation. So, Congress wins (the 2014 General Elections)!"
He was joking, of course. But it's enlightening to break down the chain of logic. The market is likely to zoom if the BJP pulls off a 4-0 assembly victory (discounting Mizoram) as the exit polls suggest. I've suggested betting on this possibility earlier as well.
If the market does zoom, that boosts chances of the PSU disinvestment programme coming through at higher rates. In turn, that helps reduce the Fiscal Deficit - even if the "disinvestment" is partly a sham with government-owned organisations, like LIC and SBI Mutual, buying stakes in PSUs.
The Current Account Deficit has already reduced sharply in the second quarter. It is likely to stay down for the full fiscal, provided the rupee doesn't jump. Exports have risen as the rupee got weaker and imports have corrected down. (Gold is coming in through "unofficial" channels after import restrictions but that doesn't put pressure on the official CAD).
The easing of sanctions on Iran and its potential to again become a global oil supplier has led to crude prices easing down. There will be some upwards pressure as central heating needs rise in cold Northern countries. But crude prices are more likely to stay low than not. Crude at low rates has a beneficial effect on inflation. The other big Indian inflation component - food - is intractable so, inflation won't fall below a certain level though.
However, inflation may fall enough for banks to cut interest rates. Real estate rates are flat or falling, due to high unsold inventory in many places. Maybe a combination of lower interest rates for housing loans and flat real estate prices could trigger a rebound in housing demand. Also the Q2 numbers suggest that the economy has finally bottomed, and it could be due for a little rebound.
If any of this happens, and some of it seems likely at least, the Congress will undoubtedly claim 100 per cent credit for it. However, will investment sentiment or consumer sentiment recover to any great degree prior to the elections? If consumer sentiment does recover, the Congress would have a better chance than seems likely at this instant.
There are about five months to go before elections - let's say, roughly two quarters worth of data and time. That is a relatively narrow window. The time cycle of sentiment breakdown and recovery is very difficult to quantify, or even to hazard guesses about. In addition, consumer sentiment or voter sentiment is different from investor sentiment. Every adult is a consumer-voter but few actually invest.
Prior history like the 2004 elections for example, suggests consumer sentiment lags economic data. The NDA lost because "India Shining" was still just a statistical construct when Vajpayee called an early poll. The economic recovery was indeed well under way, and it turned into a big boom that lasted until early 2008. But circa May 2004, voters remembered three years of privation and just didn't believe things had gotten better. Right or wrong, they blamed the NDA for this.
Balanced against that data point of 2004, we have a 100-year pattern of investor sentiment leading the real economy. Investors anticipate future events and anticipation can be self-fulfilling. The stock market (and the bond market and commodities) tends to take off or tanks before the data, which are always released with a lag, justifies it. Higher asset prices lead to wealth effects and this can trigger higher consumption demand.
There is space for a terrific upside for equity prices via sentiment-driven capital gains. The past two years have seen the stock market pushed up by FII buying while domestic investors have been sellers. If domestic institutional investors and big operators start speculating on an NDA comeback, and FIIs continue to remain positive, we would see an "only buyers" situation.
If the stock market zooms into a new zone of all time highs, it could create some sort of wealth effect and trigger a recovery in real consumption. That may, in turn, lead to an accelerated turnaround in voting sentiment. I don't think it will - the vast majority of voters are disconnected from equity markets. But it's not impossible. Stranger things have happened.
