Will elections slow down growth?

Thu, 9 Jan Pre-Open

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The father of value investing, Ben Graham, once famously said: 'In the long run, markets are like a weighing machine but in the short run, they are like a voting machine'. This means, a stock's price is driven in the long term, only by the performance of the business. However, in the short term, people's emotions and news events may drive stock prices, irrespective of the business performance.

In the Indian context, a big event is fast approaching that could have a significant effect on businesses as well as the stock markets. This event is of course the general elections which will be held during April-May 2014. While its effect on the stock markets may be understandable, can the elections have an adverse effect on the larger economy? There is increasing concern that the uncertainty regarding the outcome of the elections, may be affecting the economy adversely.

As per leading news daily, the industry association ASSOCHAM has expressed this concern after conducting a study in this regard. As per the study, many investors, business leaders and economists are now of the opinion that if there were to be an unstable government after the elections, GDP growth could suffer badly due to 'left-of-centre economic policies'. Such policies entail higher government spending to support various social welfare schemes coupled with higher taxes on businesses and the rich. This possibility has increased due to the performance of the Aam Aadmi Party in the recent state elections. Clearly, the mood among businessmen and investors seem to be that there is no political party with the will to push through much needed 'free-market friendly' economic reforms.

While it's true that India has a large number of underprivileged people, many of them below the poverty line, policy making should not follow an overly socialist path. Gradually opening up the economy, both financial markets and various sectors, will have a strong positive effect in terms of higher employment, lower inflation etc. On the other hand, it can be rightly said that the Indian economy has grown despite and not because of the various government policies over the years. In the short term, the results of the upcoming general elections will certainly have an impact on the economy, either positive or negative. However in the long term, various sectors and businesses can thrive even in the absence of sensible economic policies by the government.