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.
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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