Lessons from market cycles – Chapter 3

It was New Year's Eve 1999, the dawn of the new millennium. A close friend – a tech specialist at a top consulting firm – called to wish me a happy new year. He sounded unusually upbeat. When I asked why, he proudly said he had made a fortune in the stock market, his bonus was huge, and he had even taken loans for a luxury car and a bigger apartment. He had poured a lot into random "technology" stocks.

He urged me to jump in on a small tech company about to launch an ADR (American Depositary Receipt) on Nasdaq. Its price had shot from ₹15 to ₹85 in just six weeks. “It will hit ₹250 soon”, he said with total confidence.

I actually knew more about that company than he did. It was basically a shell – recently renamed from “XYZ Securities Ltd” to “XYZ Infosys Limited.” No real business, no employees, no assets. When I tried to warn him, he brushed me off: “You have no idea what's coming”.

That Diwali in 2000 turned out to be the darkest day of his life. He had lost everything – his job, savings, home, car, marriage, health, and his confidence. He moved back to his parents’ house carrying debt of over ₹70 lakh.

The run-up from December 1998 to February 2000 was one of the wildest periods in Indian stock market history. The Nifty50 index more than doubled (over 120% gain) in just 15 months, driven mostly by “new-age” tech, media, and telecom companies. Buzzwords like ICE (Information, Communication, Entertainment) and TMT (Technology, Media, Telecom) were everywhere.

To really understand the magnitude of madness, one needs to note the challenging backdrop:

Politically, India was unstable. From May 1996 to October 1999 – just 40 months – we had three general elections. Each produced hung parliaments and shaky coalitions of 20+ parties.

Economically, things were rough. GDP growth crashed to around 4.3% in FY98 (from 8% the year before). Consumer inflation averaged over 13% in 1998, peaking at nearly 20% in late 1998. The RBI jacked up its Bank Rate to 11% early that year, hiked repo rates sharply (up to 14% by mid-2000), and prime lending rates hit 13–14%. Riskier borrowers paid 15–19%.

Geopolitically, we fought the Kargil War with Pakistan in May–July 1999. Tensions with China rose too – India openly called China “Enemy No. 1”, and China backed Pakistan during Kargil.

Internationally, after India's nuclear tests in May 1998 (Pokhran-II), the US, Japan, and others slapped on economic, tech, and military sanctions.

Globally, the US Fed's easy money policies fueled a massive dot-com bubble. Tech companies with no profits or clear business models traded at insane valuations.

The Y2K scare created huge demand for software fixes. Indian IT firms sent thousands of engineers abroad to update old systems before January 1, 2000. Suddenly, every middle-class family wanted their kids to learn coding. Computer coaching centers popped up on every street. Wipro's Azim Premji briefly became one of the world's richest people (second at one point in early 2000). Infosys and TCS turned into household names.

Hundreds of companies slapped “Technology”, “Infosys”, “Media”, or “Communication” onto their names. Big business houses rushed to launch tech subsidiaries. Overnight, firms with zero tech know-how or real business popped up and soared to crazy prices.

Old valuation rules went out the window. People talked about “eyeballs” and “footfalls” instead of earnings. Just like Harshad Mehta in the early '90s, operators like Ketan Parekh manipulated stocks – especially a group called the "K-10" – luring everyday investors like my friend with hype and fancy jargon.

The bubble burst in February 2000. The Nifty gave back all those gains over the next 18 months. By September 2001, it was back to December 1998 levels. Most fake tech companies disappeared fast. Many big groups quietly dropped their IT dreams and refocused on core businesses.

The few solid players that survived the storm? They went on to make India a global IT services powerhouse and added real strength to our economy.

My lesson from this episode

Tech revolutions are disruptive and powerful – they eventually make economies and markets stronger. But not every investor has to jump in headfirst during the chaos. Sometimes the smartest move is to watch safely from the sidelines until the storm passes. There are always plenty of good opportunities once things calm down.

That experience with my friend still reminds me: When excitement drowns out common sense, step back. Real winners in stock markets are found with patience, not panic buying.

Also read

Chapter 1

Chapter 2

 

Is it a pause or break?

I completed my education and professional training in the early 1990s, just as India stood at the edge of profound change. The assassination of Rajiv Gandhi in 1991 had created a vacuum in the Congress party. P.V. Narasimha Rao led a fragile minority government through a perfect storm: a balance-of-payments crisis; two failed monsoons; the Gulf War spike in oil prices; double-digit inflation; a crippling fiscal deficit; the Harshad Mehta scam; and simmering insurgencies in J&K, Punjab, & the Northeast. Mandal reservations and the Ayodhya movement had polarized society; the 1992 demolition and subsequent Mumbai blasts shattered everyday calm.

In that crucible, Rao and Finance Minister Manmohan Singh launched the 1991 liberalization. Industrial licensing was slashed, the rupee was devalued by nearly 20% in two swift moves, trade was opened, foreign portfolio investment welcomed, and the foundations of modern capital markets laid. Within five years the economy was back on a higher growth path.

The 1996 election ended Congress rule and ushered in three years of political instability (Three general elections during 1996–99). Yet the reform momentum not only survived but accelerated. The United Front government deepened financial-sector and fiscal reforms. Vajpayee’s NDA (1998–2004) opened core sectors—telecom, power, roads, ports, oil & gas—to private and foreign players, launched the National Highways Development Project, announced the SEZ policy, conducted nuclear tests, and weathered sanctions and the dot-com crash. India emerged as a recognized IT powerhouse and strategic nuclear power.

The UPA years (2004–14) built on this foundation while adding a strong social dimension. Markets were opened further, NPCI was established (laying groundwork for later digital payments), and landmark rights-based legislation was enacted: RTI, MNREGA, RTE, NRHM, and the Food Security Act. Growth averaged over 8% for much of the period despite the 2008 global crisis, though a current-account scare in 2012-13 required swift RBI action.

When the NDA returned in 2014 under Narendra Modi, it inherited an economy recovering but scarred by the previous slowdown. Far from avoiding major reforms, the government completed and launched several of its own: the long-awaited GST (2017) created a unified national market; the Insolvency and Bankruptcy Code (2016) cleaned up NPAs; four Labour Codes rationalized archaic laws; corporate tax rates were cut; direct benefit transfers scaled massively via the JAM trinity; and UPI revolutionized digital payments. Infrastructure spending surged, Ease of Doing Business rankings improved, and schemes emphasizes on manufacturing were reinforced under Make in India and Production-Linked Incentives banners.

Growth has not been linear though. The 2016 demonetization and GST rollout caused temporary disruption; COVID-19 delivered a sharp contraction. Yet India has remained the fastest-growing major economy in most post-pandemic years. Recent quarters have shown strong rebounds, though challenges persist: uneven job quality (especially for educated youth), volatile foreign flows, a tight fiscal position, and rising aspirations of one billion young Indians.

I still believe we are witnessing a pause in our journey of growth, not a break. The institutional scaffolding built over three decades—open markets, digital public infrastructure, a resilient banking system—remains intact.

In my view, the next three years will be decisive. How the government sequences the next wave of reforms (land, labour, agriculture marketing, and trade openness), executes with consistency, and manages fiscal discipline will determine whether India’s growth story merely pauses or regains its full stride. The momentum built since 1991 has bent but not broken. With pragmatic course-correction, the best chapters may still lie ahead.

M7 + M2 that crushed Bihar’s opposition

Bihar assembly elections concluded last week with the incumbent NDA government registering an astounding victory, belying all expectations of anti-incumbency; a strong show by the opposition alliance (MGB); and a surprise by JSP (Jan Suraaj Party), floated by election strategist-turned-politician Prashant Kishor. Almost every exit poll and ground report got Bihar 2025 spectacularly wrong. The NDA’s landslide was not a wave — it was an annihilation.

In my view, the result was a foregone conclusion for anyone who looked beyond Twitter trends and Tejashwi’s viral reels. Numerous independent forecasters, reporters and experts, who claimed to have spent weeks “on the ground”, completely failed to assess the likely outcome of the elections.

The opposition alliance completely lacked seriousness, strategy and resources; notwithstanding the social media noise. The new challenger JSP lacked resources and credibility (was mostly seen as a BJP agent put up to cut into opposition votes). They were no match for the massive deployment of M7 (Meticulous planning, Men, Machine, Media, Money, Mandir and Modi) Force by the incumbent NDA. Besides, they managed the most relevant M2 (Muslim and Mahila) extremely well through tactically supporting AIMIM and offering cash to women, just ahead of elections. More than 100 MPs of BJP spent weeks campaigning in the hinterland. Several of the Chief Ministers of BJP ruled states held dozens of rallies across the state. NDA had appointed multiple booth agents several weeks in advance.

The opposition leaders, Rahul Gandhi and Tejashwi Yadav mostly resorted to gimmicks; and “hoped” for anti-incumbency to work in their favor. They could neither adequately highlight the failures of the incumbent Chief Minister (almost 20 years), nor present a coherent and credible agenda for development.

After this headline comment, I would like to share some of my impressions about Bihar, made during a short visit to the state.

·         The socio-economic milieu of Bihar is uncannily similar to the broader picture of India. For example, most educated youth are eager to migrate out of the state - NCR, Bengaluru and Mumbai being the most coveted destinations, just like the educated youth from “developed” states look to immigrate overseas. Most rich people have invested in real estate and businesses outside the state, just like rich people from Delhi and Mumbai buying real estate in UAE, Portugal, and UK etc. Most aspire to send their children to study in schools and colleges outside the state, just like people in other states aspire a “foreign degree” for their wards.

·         Migrated Biharis, who are well settled in other states make references to the rich culture, heritage and resource pool of Bihar, in the same manner as NRIs settled overseas, with no intent to return, invest or otherwise contribute to their cherished homeland.

·         Election in Bihar is a distinct, stand-alone spectacle event, totally disconnected from the regular life of the local populace. Most treat it like a once in five-year village fair, where artists from outside come and perform. They get a chance to feast and enjoy dance performances. In the end they vote for the best orchestra performance, and return to their routine life.

·         A disturbing chunk of Bihar’s wildly popular Bhojpuri music, cinema and ‘orchestra’ programmes revolves around double-meaning lyrics, voyeuristic camera angles and incest-themed humor that would be cancelled in many other states. A noticeable section of Bihar’s youth—especially in semi-urban and rural pockets—consume a worrying volume of low-quality, hyper-sexualized Bhojpuri content, which shapes attitudes and aspirations in ways that deserve deeper study. In most village orchestra performances (election rallies, puja pandals, marriages etc.) that I witnessed, and in several popular Bhojpuri music videos I watched, this was a common theme. This section of youth may be susceptible to get trapped in a PIT (addiction to Porn, Incest and Tobacco).

·         Liquor ban has helped several households. Particularly, women in these households are grateful to the administration for saving their families. However, implementation of the prohibition policy is definitely not commendable. The cases of spurious liquor, smuggling from neighboring states, and corruption in enforcement are not uncommon.

·         The biggest paradox of Bihar is that it has one of the most aware populations (socially, culturally, politically, and economically); but only a few seem to be exercising their rights. You may find farmers who can quote Amartya Sen on entitlement failure but will not protest when their PMAY house is delayed by five years and a ₹50,000 bribe is demanded. They have accepted corruption, non-performance, apathy, and indifference of administration as a fait accompli. Rhetoric during the festival of elections apart, it is hard to find people raising voice for their rights.

·         Rural housing and rural roads have been the best performing government schemes in Bihar, though it is not uncommon to hear complaints of corruption in these two programs also. Collapsing bridges, stolen roads, schools, primary health centers, etc. in Bihar are all part of the social media folklore.

Overall, my impression is that Bihar today is India’s most politically sophisticated state trapped in an economically prehistoric age. Until private capital sees profit, until a real entrepreneurial class emerges from within (not just Delhi-returned IAS officers’ sons), and until Biharis start punishing non-performance instead of rewarding freebies and identity, progress might remain incremental, corrupt, and cruelly slow.

 

Union Budget FY25 – Shaking the cart, adding uncertainty

 The final budget presented by the finance minister has shaken the market cart, and added material uncertainty to policy making. The efforts to minimize uncertainty after demonetization have thus been negated to some extent.

As has been the practice in the past few years, the budget speech of the finance minister materially diverges from the actual budgetary provisions. By changing the capital gain tax regime and mentioning that they are working on a new Income tax law, they have forced the stakeholders to build-in a higher degree of policy uncertainty and unmindful regulatory provisions in their business and investment plans. Claiming simplification while introducing new complications (e.g., more transactions under TDS/TCS) has been a hallmark of the taxation policy in recent years. Use of technology is invariably claimed as an achievement, as if there is an option.

The level of uncertainty could be gauged from the fact that the priorities outlined in this budget are materially different from the interim budget presented just five months ago

Regardless, there are some positive take away from this budget that need to be commended.

Positive take away

Land reforms including digitization of land records got prominent mention in the finance minister’s speech. The minister mentioned that “Land-related reforms and actions, both in rural and urban areas, will cover (1) land administration, planning and management, and (2) urban planning, usage and building bylaws. These will be incentivized for completion within the next 3 years through appropriate fiscal support.” Linking central assistance to lower stamp duty could be a material impetus to urban development.

Fiscal consolidation. The finance minister refrained from splurging the extra resources generated through higher dividend from RBI &, PSUs, and additional tax revenue. She utilized it to bring the fiscal deficit down to 4.9% (vs 5.1% in the interim budget). Even the new development projects announced for the key coalition partners (JDU of Bihar and TDP of Andhra Pradesh) are proposed to be funded by the loans from the multilateral agencies like World Bank etc., where the Central Government might provide guarantee. The commitment to bring the public debt on a declining path from next year is also commendable.

Savings for children. Allowing pension accounts for minor children is a positive step for developing the social security framework. Retirement planning from birth should benefit a large number of savers in participating in the golden age of Indian financial markets and accumulating a decent retirement corpus.

Abolition of Angel-Tax. Angel tax is levied on the capital raised via the issue of shares by unlisted companies from an Indian investor if the share price of issued shares is seen in excess of the fair market value of the company. The excess realization is considered as income of the company and is taxed accordingly. The finance minister has proposed to abolish this tax (Section 56 (2)). This is a welcome step as it has been causing hardship to innovators.

Rental housing for industrial workers. The finance minister proposed, “Rental housing with dormitory type accommodation for industrial workers will be facilitated in PPP mode with VGF support and commitment from anchor industries.” This scheme if implemented properly can be a major reform in labor migration, urban planning and ease of living for poor laborers.

Issues that need deeper scrutiny

Forcing private capex: The Economic Survey highlighted that the private sector has not adequately responded to the incentives for capex. It seems the government now intends to force the private enterprises to invest more money in building capacity and generating employment. The budget adopts a carrot and stick approach for that. On one hand, it provides support for hiring more fresher employees and skill them, and on the other hand it makes outflow of funds from companies difficult. After dividends, now buybacks are also made tax inefficient. The idea seems to “encourage” companies to invest in growing their businesses and reward shareholders through share price appreciation only.

New income tax law. The Direct Tax Code had been hanging on the taxpayers’ head for almost two decades. It was shelved a few years ago. However, the finance minister has revived the proposal adding uncertainty about the tax provisions.

Backdoor entry of Estate duty. The changes in the capital gain tax regime give an impression that the government is testing the introduction of a wealth transfer scheme (Estate Duty) in future. The effective capital gain tax on legacy assets (Large Real Estate, legacy precious metals, jewelry etc.) has been increased by taking away the indexation benefit. It is to be seen whether this effort is widened and deepened in the coming years.

Taxation of bonds. The tax on gains made on sale of unlisted bonds has been enhanced to the marginal rate of taxation. This brings bonds at par with bank fixed deposits. This is in tandem with the concerns expressed by the RBI on money being diverted away from bank deposits. On the positive side, this may provide impetus to development of retail debt market by encouraging companies to list their bonds.

Gold and financialization of the economy. Ever since the government embarked on the path of economic reform and liberalization in 1991, the emphasis of policy has been to achieve higher degree of the financialization of the Indian economy. Low level of financialization of economy has in fact been sold as an USP of Indian markets, for it offered huge growth potential. Lamenting higher degree of financialization of the Indian economy in the Economic Survey, raising effective tax on bonds and bringing duty of gold lower contradict this concept.

New rum in old bottles. The finance minister has presented many ideas as path breaking, while these are already running schemes and execution has been below par. For example, rural roads, mission for pulses and oilseeds, organic farming, horticulture, blue economy (shrimp etc.), Employment incentive and support for MSME (introduced during Covid), Skill India, Industrial Parks, etc.

Protection to local manufacturing cut. The finance minister has cut basic custom duty on mobile phone, mobile PCBA and mobile charger to 15 per cent, reducing protection for the local manufacturers. This should be kept in mind by the analysts who are assuming status quo on policy for many EMS players for decades while making earnings forecasts.

Union Budget 2004-25

The following are the key highlights of the final Union Budget for FY25

Budget priorities

1)    Productivity and resilience in Agriculture

2)    Employment & Skilling

3)    Inclusive Human Resource Development and Social Justice

4)    Manufacturing & Services

5)    Urban Development

6)    Energy Security

7)    Infrastructure

8)    Innovation, Research & Development and

9)    Next Generation Reforms

Key direct tax proposals

Corporate/firms Tax

·         For foreign companies the rate of tax reduced from 40% to 35%, on income other than income chargeable at special rates, specified in respective sections of Chapter XII of the Act.

·         Deduction under section 36(1)(iva) in respect of contribution to pension fund approved u/s 80CCD increased to 14% of salary from earlier 10% of salary, provided the employee concerned has chosen the new tax scheme.

·         Section 56(2)(viib) imposing Angel tax on companies is proposed to be abolished.

·         Payments to partners by way of salary, remuneration, commission, bonus and interest etc. to be liable for 10% TDS.

Personal taxation

·         Amount of standard deduction on salary income increased to Rs75000 from the present Rs50000 for assessees filing return under the new tax scheme. For family pension standard deduction under new scheme will be Rs25000 instead of Rs15000.

·         Any Tax Collected at Source from an employee to be adjusted in computation of TDS by the employer.

·         Tax collected at source for a minor can be claimed by the parent if the income of such minor is clubbed with such parent.

·         The entire amount received from tendering of share under a buy back will be taxed as dividend income. The cost of acquisition of shares can be claimed as capital loss that can be set off against capital gains as per the prevailing rules of set off. (applicable from 1 October 2024)

·         Rent from house property cannot be shown as business income. It must be shown separately under the head income from house property and taxed accordingly.

Rationalization of capital gains tax (applicable from 23^rd July 2024)

·         Holding periods for various assets reduced to two – 12 and 24months from the present three –12, 24 and 36 months.

·         Assets divided into three categories – Listed financial securities, Equity MFs & Business trust (e.g., REITS), and other assets. Listed financial securities, Equity MF and Business Trust held for less than 12 months shall be short term assets and otherwise long term. All other assets to be long term if held for more than 24 months.

·         Listed financial securities (STT paid), Equity MFs and Business Trust – STCG Tax would be 20%.

·         LTCG Tax for all other assets would be 12.5% without any indexation benefit. LTCG of upto Rs1,25,000 exempted from tax for Listed financial securities (STT paid), Equity MFs and Business Trust.

·         STCG Tax on all other assets would be the marginal rate of taxation.

·         Unlisted bonds, debentures to be taxed at the marginal rate.

·         Capital gain tax rates to be same for both Resident and Non-Resident assessees.

·         Gift of assets by assessees other than individual and HUF to be fully taxable.

Rationalization of TDS

·         Sale of more goods with sale price exceeding Rs10 lacs to be made liable to TCS.

·         Rs 50 lac limit for TCS on sale of property to be considered as total sale consideration and not the consideration per buyer, where there are multiple buyers.

STT rates

·         It is proposed to increase the said rates of securities transaction tax on sale of an option in securities from 0.0625% to 0.1% of the option premium, and on sale of a futures in securities from 0.0125 per cent to 0.02 per cent of the price at which such “futures” are traded.

Others

·         Notice u/s 148 for reassessment can be issued only upto three years where income suspected to have escaped assessment is less than Rs50 lacs. In other case time limit would be six years.

·         Provisions for registration of charitable organization u/s 10(23C) and u/s 11 to 13 found overlapping. Accordingly, it is proposed to make section 11 to 13 the operational sections. Section 10(23C) will be used for transitory provisions only. The timeline for application for eligibility u/s 80G also rationalized.

·         New Vivaad se Vishwas 2024 Scheme to be launched.

·         Moveable foreign assets worth less than Rs20 lacs not to attract provisions of section 42 and 43 of Black Money Act. 

Key Budget features

Some key budget statistics

Fiscal Trends

What now?

The stock price of Heritage Foods Limited, a milk processing company based in Andhra Pradesh, promoted by the family of N. Chandrababu Naidu (leader of Telugu Desham Party and CM of Andhra Pradesh) rose ~65% in the last week. The rise in stock price is apparently in response to the victory of Mr. Naidu’s party in Andhra Pradesh Assembly elections and the likelihood of it getting a pivotal role in the central government.

Stock prices of many PSEs and companies perceived to be close to victorious NDA partners witnessed heightened volatility and lost 8-15% value after election results.

What does this market behavior tell us?

Does it show that the market participants seriously believe that the elected Chief Minister of an Indian State, will “unduly” favor his family business? Or the working of a PSE depends on the number of MPs a ruling party (or coalition) has in the Parliament? Or the fate of a business in India materially depends on the closeness with the ruling party enjoyed by its promoters?

If any of this is even partially true, does it make sense to even consider investment in such a business? How the fund managers and advisors who swear in the names of Peter Lynch, Warren Buffet, Charlie Munger, could even think of investing (or advising investment) in such businesses?

Anyways, I would leave this debate for the market experts. As a tiny investor, my concern is limited to the point, whether I need to change my investment strategy or stay on my course, in light of the change in government at the center and two states (Andhra Pradesh and Odisha) since the elections are now over and a new government is taking shape.

Changed circumstance

Three notable political changes have occurred in India in the past week.

First, the NDA alliance has won the mandate to form the central government in India. The BJP, which had a strong majority in the outgoing parliament, has secured 240 (out of 543) seats in the 18^th Lok Sabha. After ten years, the BJP has fallen short of a simple majority in the Lok Sabha. It has now formed a government dependent on support of its NDA allies. Two key allies Janata Dal (United) led by the Bihar CM Nitish Kumar, and Telugu Desham Party (TDP), led by N. Chandrababu Naidu, the new CM of Andhra Pradesh.

Second, TDP led by Mr. Naidu has secured an absolute majority in the Andhra Pradesh Legislative Assembly, ousting the ruling YSRCP, led by Jaganmohan Reddy who was CM of the state for 10 years. This marks return of Mr. Naidu to power after two decades.

Third, Biju Janta Dal (BJD, led by Naveen Patnaik, lost power in Odisha state after 25years. The BJP secured a simple majority in the recently concluded assembly elections and is forming first ever government in the state on its own.

Market reaction

After an initial knee jerk reaction on the election result day, the markets have scaled new highs and look even more exuberant. On Friday, the Monetary Policy Committee of RBI decided to hold the policy rates unchanged with a 4:2 vote. Two members voted for rate cut and a change of policy stance from “withdrawal of accommodation” to “neutral”. This is also adding to the market buoyancy.

Investment strategy implication

I do not see any reason to change my investment strategy in light of the evolving political scenario. As stated earlier (see here), “I believe that in India economic policies, and therefore financial markets, are politics agnostic. I do not see the outcome of general elections impacting the Indian economy in any significant manner. The economic policy of India is still a work in progress. all governments in India in the past 40 years have made incremental improvements in the policy framework to make it congruent with the scale of economic development and changes in India's position in the global economic and strategic order.”

However, I do expect some positive developments for the economy, and therefore markets. In my view, for example—

·         The decision making at the central government level may improve materially with a stronger consultative and the decision-making process. Decisions like demonetization, abrogation of article 370 and CAA etc. had added elements of unpredictability and disruptiveness to the policy making paradigm in the past ten years. The need for a wider consultation for important decisions could eliminate these elements. On the flip side there could be some delays in decision making and market volatility may increase in cases where there is no agreement between the alliance partners.

·         In Andhra Pradesh, the work on the abandoned new Capital (Amravati) might start again. This may provide significant impetus to investment in the state.

·         The government may focus on affording more cash in the hands of the poor, especially rural poor. This may provide good support to the rural consumption, which is showing some green shoots.

·         The policy support to private capex (e.g., through PLI scheme) may continue and even get enhanced.

·         Overall, the growth may become more inclusive.

My strategy is premised on the assumption that after the final budget (July 2024) the markets shall be guided by the earnings, macro conditions, and global developments, rather than the outcome of elections. For now, I do not see any reason to change that premise.

What if? - Part 4

The ongoing celebrations of the Festival of Democracy shall end on 4^th June 2024, with the announcement of election results for the 18^th Lok Sabha. In the past two months, the market narrative in India has pivoted around the election outcome. Even though 4QFY24 earnings did impact the performance of specific stocks materially; speculation about the election results has mostly dominated the sentiments.

Once the elections are over and the contours of the new government are clear in the first fortnight of June, the focus will shift to the presentation of a full budget for the current financial year. To keep the tradition, only an interim budget (vote on account) for FY25 was presented in February 2024 to run the government till a new government is formed for the next five years. A final budget is expected to be presented by the new government in the last week of July 2024.

Some media commentators and market experts have attempted to sketch the final budget based on the election speeches and media reporting of the party’s manifestos. Fears have been expressed that in the event of a non-BJP government assuming power at the center, the pace and direction of economic growth and development may slow down as resources are diverted to fulfill the populist agenda of opposition parties. In a non-BJP regime, the budget allocation for capital expenditure and infrastructure development may diminish materially.

I find that this narrative suffers excessively from an intrinsic fear of change. I could not find anything in the manifestos of opposition parties, mainly Congress, that would suggest any change in the focus on infrastructure development and faster economic growth. Most social welfare schemes promised in the manifesto aim to reduce poverty and achieve equitable growth. Almost all these schemes are in vogue in many states and at the central level. A set of similar schemes is also promised in the BJP manifesto also.

Technically speaking, market participants should rejoice the Congress manifesto, as it promises a much larger amount of cash in the hands of consumers. This could help put the missing piece of Indian growth, viz., consumption, in place. Provisions like statutory guarantee for MSP can also boost the farm input sector. Consumers and Chemicals are two major underperforming sectors of the market.

Besides, if a non-BJP government assumes power at the center, the market participants may again begin to speculate about tax exemption for the LTCG and dividends, etc. On the other hand, several BJP leaders and think tank members have spoken about the need for estate duty (inheritance tax) in the recent past. This has been a fear factor in pre-budget analysis since 2017. The finance ministers have defended LTCG taxation and dividend tax. In the past 10 years, effective personal taxation rates have remained high and the proposed Direct Tax Code is expected to remove more exemptions.

Insofar as fiscal profligacy is concerned, there is no evidence that the UPA government (2004-2014) indulged in fiscal indiscipline during their regime. Center’s fiscal deficit did jump from 2.54% in FY06 to 6.46% in FY09 due to the stimulus necessitated by the global financial crisis. However, it was gradually brought down to below 4% by FY15. This was despite welfare schemes like MNREGA, fuel subsidies, etc. Similarly, during the NDA regime, the center’s fiscal deficit jumped to 9.17% in FY20 and has been on the mend since then. This is despite the implementation of Food Security, cash payout to farmers, and many other welfare schemes.

There is no empirical evidence to support the fears of fiscal indiscipline by a non-BJP government.

I find that most schemes and programs promised by NDA and opposition INDIA groups would be implemented, if at all, gradually and mostly by merging and optimizing existing schemes at the state and center levels. The fiscal burden will come only incrementally with the equivalent or higher rise in nominal GDP. The fear of likely fiscal slippages may therefore be unfounded.

Logically, the analysts should be looking forward to a stock market rally in the short term if a non-BJP government is formed at the center. Though, it may not actually happen. We may see a knee-jerk reaction down and then a recovery, after the full budget is presented in July.

In case of a BJP victory, we may see a euphoric move up and then a corrective move down as the budget may not enthuse the market participants and earnings fail to justify some lofty valuations.

In either case, after July 2024, the markets shall be guided by the earnings, macro conditions, and global developments, rather than the outcome of elections.

So to answer What if? – I would say Nothing, just chill.

Also read

What if? - Part 1

What if? - Part 2

What if? - Part 3

What if? – Part 3

Verdict 2024: Market Implications

An analysis of the past 30 years of market trends provides no evidence to suggest that elections, the form of government, or the strength of a particular party in the parliament impacts the market performance significantly. However, it is common to see higher volatility during or around elections.

Insofar as the fear of a multi-party coalition or a fractured mandate is concerned, I believe, the investors should be relieved by the prospects of a true coalition coming to power. Because, in the post-independence era, the best periods for the Indian economy have been those when a “coalition” government was in power.

It is however important to note that by “coalition” I do not mean just a multi-party government. In my view, coalition government means where people with diverging socio-economic policies jointly participate in a government. Empirical evidence suggests that such coalition governments in India have agreed on a common minimum agenda and focused on executing the same, avoiding conflicts and logjams.

The first cabinet of India post-independence had R. K. Shanmukham Shetty (Finance), Shyama Prasad Mukherjee (Industries) B. R. Ambedkar (Law) and Jagjiwan Ram (Labor). These people did not subscribe to the Nehruvian socio-economic agenda, but we got a robust socio-economic framework. The singular governments of Nehru (post BRA, RML, SPM - 1956 and 1961), Indira Gandhi (1971, 1980), Rajiv Gandhi (1984) are not known for good governance or transformative socio-economic reforms.

Morarji Desai (1977 – FERA dilution, Gandhian socialism), V. P. Singh (1989 – tax reforms, social justice), Chandershekhar (1990 – disinvestment, fiscal reforms), PV Narsingh Rao (1991 - liberalization, delicensing), Devegoda/IK Gujaral (1996 – dream budget), Vajpayee (1998, 1999 – divestment, infra development) and Manmohan Singh (2004 – RTI, RTE, UIDAI, Right to Food, Right to Healthcare, MNREGA, Civil Nuclear Deal, FDI in retail & pension etc.) were all coalition governments. These governments are all remembered for socio-economic reforms causing fundamental changes in the socio-economic milieu of the country. None of these governments is remembered for non-governance, anti-market policies or anti-business stance.

The incumbent government has taken three major initiatives in the past 10 years, that have helped Indian equity markets:

(a)   Abolition of 86% of currency notes in circulation in November 2016. This measure is popularly believed to have benefitted the large organized sector businesses (mostly listed) at the cost of smaller and marginal businesses (mostly unlisted).

(b)   Implementation of GST from July 2017. This is also popularly believed to have enhanced the competitiveness of large businesses (mostly listed) at the cost of smaller unorganized and non-compliant businesses.

(c)    Promoting local manufacturing through production-linked incentive (PLI) schemes for a variety of sectors.

However, the gains from these initiatives have not been true to the expectations due to the unpredictability that crept into the policy framework and sub-optimal execution.

Thus, in my view, the policy risks in India from the political side are low and not to be much bothered about. The key risk is execution and this risk has little to do with the form and constitution of the government of the day.

Insofar as the market performance during coalition or minority governments is concerned, there is no evidence that markets have performed poorly due to the form or constitution of government.

2024: Market after elections

Regardless of election results, the markets may remain volatile and directionless until a government is formed.

Bonds: The bond market will be guided by the full budget for FY25 that may be presented in the last week of July 2024. A significant violation of fiscal discipline, and disappointment in the inclusion of Indian bonds in global indices may lead to a sell-off. Else, we may see a stable bond market. A good monsoon, as forecasted by IMD and other agencies, may brighten the outlook on inflation, and a softer RBI monetary policy stance.

Equity: The corporate earnings for 4QFY24 have been below the consensus estimates. This has resulted in downgrades in FY25 and FY26 earnings forecasts. If the trend continues in 1QFY25, we may see further earnings downgrades and de-rating of the market in general.

A BJP victory, as widely expected, may extend the rally till mid-July. After that, the market direction would be determined by the budget proposals and earnings outlook.

In a less likely situation of an INDIA government, we may see a knee-jerk move downward that may get reversed in the next few weeks. After that, the market direction would be determined by budget proposals and earnings outlook. In this case, however, we may see a material sectoral rotation towards consumption, given the INDIA promise to afford significant cash in the hands of consumers.

In any case, the impact of election results may not last beyond July 2024. The strategy should therefore be to actively look for opportunities (to buy or sell) in case of any material rise or fall in prices on or after 4^th June.

Also read

What if? – Part 1

What if? – Part 2