Sunday 3 January 2016

The election results in Bihar will impact the Indian economy’s prospects.

1. The election results in Bihar will impact the Indian economy’s prospects.
The election results in the state will impact the Indian economy’s prospects.
Should the ongoing Bihar elections matter to stockmarkets? A first glance at the facts suggests they shouldn’t. Bihar contributes just 3 per cent to India’s GDP, and accounts for an insignificant part of sales for almost all listed companies. Further, even a clear outcome would not meaningfully impact Rajya Sabha seat shares in the next two years. This is important because anything beyond the next one or two years is likely to be too long for the stockmarket to worry about.

Image result for bihar election
And yet investors seem to be avidly tracking the elections. Even global investors who cover many markets seem to be aware of the Bihar elections and its key contenders. Election tourism is hot, with investors and analysts taking trips to Bihar. If only there were more people in the investor community, Bihar’s tourism industry would have seen a boost!
At the core of it, in our view, is the human frailty that Nobel laureate Daniel Kahneman points out: What appears most often is considered the most important. In particular, those in markets know intuitively the legendary Ben Graham’s phrase: In the short run, the market is a voting machine, but in the long run, it is a weighing machine. This much-quoted phrase is generally used to emphasise that long-term investors must focus on economic fundamentals. But, in the current context, the emphasis is on short-term changes and the voting-machine analogy — if the whole market is focused on an event, however unimportant it is fundamentally, everyone is forced to track it, even if the impact may be shortlived.
In what could be called the “tyranny of the headline” at a time of information overload, there is little room for a nuanced interpretation of electoral verdicts, particularly for those outside India. Results are likely to be extrapolated onto 2019 and beyond; such an interpretation would be incorrect, but is still likely and may affect foreign investor sentiment. What matters more, however, is their behaviour, which is driven by the underlying economic momentum, mostly unrelated to the results of these elections.
But is there something for the weighing-machine part of the market as well? That is, could these results impact the Indian economy’s prospects? In our view they should, on three fronts.

The first is on Bihar itself, though over several years. Continued growth in Bihar over time would also impact the cost of unskilled labour all over India, as outward migration from Bihar slows. Given Bihar’s large population share, it could also be a source of demand growth for most companies. For that, Bihar would benefit from a stable, growth-focused government with a full-term chief minister.

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