The elections and the stock market

What will be the likely impact of the election results on the stock market?
If a coalition with either of the two big parties—the Congress or the Bharatiya Janata Party (BJP)—at its core is able to form the government, the market should feel reassured. Whether it’s the BJP or the Congress is unlikely to matter, although brokers are talking of an upside for the rural story should the Congress-led United Progressive Alliance (UPA) form the government and for infrastructure (a la the Golden Quadrilateral) if the BJP-led National Democratic Alliance (NDA) takes over.

What if the Third Front is able to cobble together a ruling coalition?
Well, the market is worried about instability, rather than ideology, which is why both a UPA and an NDA government will be seen to be positive. The problem with the Third Front, say market participants, is that it’ll be very unstable and the ruling parties may, therefore, go in for populist measures, such as raising taxes for the rich, increasing capital gains tax and giveaways for the masses. It’s a bit unfair, though, to brand the Third Front as populist when the BJP manifesto promises a waiver of farm loans and both the Congress and the BJP promise cheap rice. And as for raising taxes or increasing the size of the fiscal deficit, look what’s happening in the UK and the US. Also, even a Congress- or BJP-led coalition with volatile partners such as Jayalalithaa or Mayawati may not be very stable.

Nevertheless, a Third Front government is likely to make the market very jittery.
But while the market may go down immediately if the government is unstable, won’t that fall be short-lived? After all, in 2004 the markets were frozen at the lower circuit after it became clear that a UPA government with the support of the Left was going to form the government. Analysts point out, though, that things are very different this time. In 2004, the stock market boom was just getting under way while this time the markets are deep in distress.

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