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Investing in India - Honest Truth by Ajit Dayal
The Big Fat Indian Election #TBFIE A  A  A
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7 MARCH 2014

The greatest battle on Planet Earth has officially begun.

Welcome to The Big Fat Indian Election!
Between April 7 and May 12, an estimated 9,000 candidates will begin the war for the 543seats for elections to the 16th Lok Sabha.

Table 1: In 2009, the 2 "National" parties won a majority of votes for the first time since 1991
  1999 2004 2009 2014 est.
Total voters 620 m 672 m 710 m 814 m
Who voted 60% 58% 58% 65%*
Electronic machines Na 1,140,000 1,183,543 1,300,000
Poll stations Na 690,670 834,944 930,000
Seats 543 543 543 543
Candidates 4,648 5,435 8,070 9,000*
Congress Party won 114 145 204  
  21% 27% 38%  
BJP won 182 138 121  
  34% 25% 22%  
Regional/Others 247 260 218  
  45% 48% 40%  
Coalition government led by BJP Congress Congress  
Source: Election Commission of India, *Quantum Mutual Fund estimates and general views

The war will be physically fought in the dusty trenches and maidans of India but - what the hopeful candidates will wish for - is to capture your heart.

As an estimated 814 million voters decide to cast their votes (or ignore the tamasha), the Election Commission will oversee 930,000 polling stations over 9 dates of polling spread over 6 weeks.

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Sorry, IPL, the Home Ministry has better things to do than give protection to a fading entertainment event which is prone to match-fixing antics. In fact, it is possible that by hosting the IPL 7 at the same time as The Big Fat Indian Election, the bookies may not devote much time to the cricketeering and racketeering and may focus their resources on the outcome of The Big Fat Indian Election.

Jai Ho!
Depending on which political party you belong to, you may have your own view of the outcome of the greatest show on earth: The Big Fat Indian Election.

But, for now, the consensus says the BJP will be the single largest party and - with some minimum help from coalition partners - will form the next government.

The Congress will revert to what it was in 1999 and 2004.

The Aam Aadmi Party may get some seats but not beyond 50.

The multiple regional parties (there are 36 other parties in the 15th Lok Sabha) - including the Third Front, which seems doomed to the cycle of death and rebirth for some past sins- will get below 200 seats.

Table 2: And the winner will be.... Indian democracy!
  1999 2004 2009 2014 est.
Total voters 620 m 672 m 710 m 814 m
Who voted 60% 58% 58% 65%*
Electronic machines Na 1,140,000 1,183,543 1,300,000
Poll stations Na 690,670 834,944 930,000
Seats 543 543 543 543
Candidates 4,648 5,435 8,070 9,000*
Congress Party won 114 145 204 120 - 150
  21% 27% 38% 22% -27%
BJP won 182 138 121 180-200
  34% 25% 22% 33% - 37%
Aam Aadmi Party 0 0 0 20 - 50
Regional/Others 247 260 218 180-170
  45% 48% 40% 37%-40%
Coalition government led by BJP Congress Congress BJP
Source: Election Commission of India, *Quantum Mutual Fund estimates and general views

50 days of excitement!
For the next 50 trading days, the S&P BSE 30 Index will gyrate like the heroines of Bollywood with a lot of suggestive moves but, no permanency.

But the best moves, the climax as it were, will be on Monday, May 19th: that will be the first trading day after the announcement of the election results.

Look what happened to the BSE-30 Index in May, 2004 when the then incumbent BJP lost to the upcoming Congress-led UPA 1 (see Graph 1)

Graph 1: In May 2004, the incumbent BJP lost the election to the Congress-led coalition and stocks nose-dived
Source: Bloomberg:

And remember the surprisingly better showing of the Congress which resulted in UPA-2? The BSE-30 Index surged by +17.2% in 36 seconds of trading with 3 circuit breakers on May 18, 2009 - the first trading day after the elections were announced!

Graph 2: In May 2009, the incumbent Congress-led coalition did better than expected and stocks surged by +17.2% in 36 seconds of trading on May 18
Source: Bloomberg:

...and then the reality
But those gyrations were in the honeymoon (or nightmare) periods.
After the tamasha of #TBFIE dies down and the bookies have packed their bags to start taking bets on IPL 7, reality tends to seep in.
The tantalizing Bollywood dancer is now a mother - she begins to be judged differently.

The investors now wish to know the long term economic policies: the focus on inflation, interest rates, fiscal deficits, current account deficits, and an endless list of "policy" choices.

Chart 1: GDP real growth rate across 9 governments has been 6.2% p.a. over the past 33 years - 6.5% is a good long term assumption.
Note: 9 governments of which 6 were coalition government
Source: Quantum Advisors, World Bank

And based on the handling of this - within a changing global environment - the stock markets will boom or fade into irrelevance.

Consider this:
After the shock defeat of the BJP in 2004, the BSE-30 Index collapsed by -20% within one week.
Yet, for the tenure of the Congress-led, UPA 1 government, the BSE-30 Index surged by +207% in Rupee terms. For FII investors, the return was +197% after taking into account a 10% decline in the INR against the USD over that 5-year period from 2004 till 2009.

After the surprise win of the Congress by a better margin in the 2009 elections, the stock markets surged by +17.2% on May 18, 2009. Yet, over the tenure of this government, the BSE-30 Index has gained +40% in Rupee terms. It would have been better for most investors to have put their money in fixed deposits! For the FII, the performance was dismal. The weak INR decimated their return to +6% in USD over this entire 5 year time period.
Invest or speculate?
As a speculator the next 50 trading days will give you the opportunity to make - or lose - a lot of money.
Dance, eat, and celebrate #TBFIE.

As an investor, the long term economic framework within which Indian businesses operate - across election cycles and multiple #TBFIE occurrences - is far more important. Elections and election results are irrelevant to the long term performance of your portfolio.

So, keep the chilled nimbu paani and hot chia ready, the chiwda and thepla close by, and a remote to watch the excitement of the greatest battle ever fought on planet earth: #TBFIE.

Click if you agree with this: Yes, I, the reader, want to get some trading advice on how to make money over the next 50 trading days... (Hosted in The Equitymaster Club)

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2 Responses to "The Big Fat Indian Election #TBFIE"
Pradeep Kumar Dash
Mar 16, 2014
The analysis & suggestion are good . This is no doubt , would be an eye to invest . Like 
Ashok Dash
Mar 10, 2014
Thank you for giving the real fact. Like 
  
Equitymaster requests your view! Post a comment on "The Big Fat Indian Election #TBFIE". Click here!