Vajpayee's NDA versus Modi's NDA- What it means to stock markets Comparative analysis of market performances between the present NDA and previous NDA governments clearly shows the importance of political stability
Since the NDA formed a government under the leadership of Prime Minister Narendra Modi in 2014, the Sensex has jumped over 54 per cent from May that year to above 35,000 in 2018. The performance of the domestic stock markets during the present NDA government seems far superior to that of the previous one. In contrast to the 54 per cent jump so far, the Sensex almost stagnated around 5,000 points during the previous NDA government. It was at 5,033 in mid-October 1999 and fell down marginally to 5,006 in May 2004 when the government ended its term.Even the market volatility has been contained in a much better way in the present NDA regime. The worst fall in the Sensex has been around 23 per cent — from the peak of 30,000 points in March 2015 to 23,100 in March 2016. This was on account of a significant rise in deflationary pressures in early 2016 when oil prices hit a 12-year low.
Later the Sensex bounced back 55 per cent to over 35,600 now. Moderation in global deflationary pressures accompanied by bold economic reform measures such as the GST helped this sharp rise in the markets. In the previous NDA government, the Sensex fell 55 per cent from the regime’s peak of 6,151 in February 2000 to 2,811 in September 2001. While the peak Sensex in 2000 was partly helped by the worldwide dot-com boom, the crash was on account of its burst and one of the lowest GDP growth rates of 4.4 per cent in FY2001.Of course, the previous NDA regime also executed major economic development measures such as the launch of the National Highway Development Project (with the first phase being the Golden Quadrilateral road network) and introduced the Fiscal Responsibility Act that aimed to bring down the fiscal deficit. Further, the Atal Bihari Vajpayee government formed a separate disinvestment ministry and divested stakes in Bharat Aluminium Company, Hindustan Zinc, Indian Petrochemicals Corporation and VSNL.However, the present NDA regime did more on economic reform measures; it divested stakes in public sector undertakings (PSUs) more aggressively. It divested shares of PSUs in open markets or through government ETFs, avoiding controversies unlike the previous NDA that sold shares to private industrial houses. The previous NDA focused on growth through road projects and fiscal prudence. The present regime not only focused on these two issues aggressively but it also executed bold moves to bring in structural changes in the economy. Though demonetisation failed to deliver desired results, the courage with which the Modi government took up this initiative and followed it up with the GST implementation gave a lot of confidence to investors. Before GST, it also executed reform measures of liberal FDI (foreign direct investment) in the insurance and aviation sectors. Unfortunately, the previous NDA regime couldn’t focus on path-breaking economic reforms since the BJP, the main ruling party, could get only 182 seats; it had to form a coalition of 24 political parties to govern the country. Most of the time, it had to spend time and efforts on maintaining political stability rather than on concentrating on major economic reforms. In fact, before the term of the government ended, it saw the exodus of many small parties from the coalition. The issue of political stability was the core worrying factor for the markets most of the times. The Sensex fell 12 per cent within two weeks after the Vajpayee government was formed with the support of allies. When the exodus of small parties started just before 2014 general elections, the Sensex again fell 20 per cent from 5,921 in December 2013 to 4,760 in May 2014.Unfortunately, the previous NDA government experienced the worst rainfall in 2002 that led to a record high level of drought in the country, which in turn resulted in the lowest GDP growth of this regime at 4.3 per cent in FY2003. However, as compared to the previous NDA regime, the present government was quite lucky – it saw relatively better monsoon performances and also enjoyed the benefit of cheap oil most of the times. From the peak of around $115 a barrel in mid-2014, prices crashed 75 per cent to a 13-year low of around $28 a barrel in February 2016.Though oil prices bounced back 160 per cent from this record low level, it is still 35 per cent down from the peak price seen at the time of
formation of the present NDA government. Comparative analysis of market performances between the present NDA government and the previous one clearly shows the importance of political stability without any predominant pressures to manage alliance partners. Such an ideal environment would allow the government to focus on economic reform measures and growth; the same enables the market to shift vertically in the long term. However, exogenous factors such as oil prices, extreme monsoon performance, global deflationary conditions and also sector-specific global crises (like the dot-com crash in 2,000 or financial sector crash in 2008) decide the magnitude of volatilities in the Indian equity markets for any regime. Whichever party comes to power in 2019, the extent of political stability would decide the course of overall market performance at the end of its five-year term and exogenous factors highlighted above would dictate the degree of market volatilities in the period of its governance.