India’s markets don’t know if Modi is in trouble

After the markets had their worst day in four months, it became enough of a story that Modi’s right-hand man, Home Minister Amit Shah, stepped in to advise investors to 'buy before June 4' because, he said, stock prices would shoot up after a dominant victory for Modi’s Bharatiya Janata Party.

By Mihir Sharma

The Indian stock markets seem to think Prime Minister Narendra Modi’s re-election campaign is struggling. They closed lower on successive trading days last week, and many analysts blamed uncertainty about the election results for the bourse’s jitters.

After the markets had their worst day in four months, it became enough of a story that Modi’s right-hand man, Home Minister Amit Shah, stepped in to advise investors to “buy before June 4” — the date that the election results are declared — because, he said, stock prices would shoot up after a dominant victory for Modi’s Bharatiya Janata Party.

While a bit of uncertainty about the election is warranted, reading anything more than a lack of credible information into the markets’ nervousness would be a mistake. India’s election process is very long: It began on April 19 and will not conclude until June. During that period, the law specifies that opinion polls cannot be released. So, we simply don’t have any reliable guide as to what the voters are thinking.

On at least one occasion — in 2004, when the election was shorter in duration — the electorate’s mood seemed to change sufficiently between the final opinion polls and the conclusion of voting for the incumbent government to lose unexpectedly.

It makes perfect sense, therefore, for there to be less certainty about the results of an Indian election than elsewhere, and for there to be a corresponding degree of volatility in the country’s stock markets. That doesn’t mean traders have any real information that Modi is in danger of losing ground.

Some analysts have presented disparate pieces of evidence to sustain the Modi-in-trouble thesis. The prime minister’s rhetoric on the hustings has been more aggressive than expected, leading to speculation that his campaign managers think they’re in trouble. And turnout numbers have been lower than the BJP hoped for, causing some to suggest the party’s loyalists are staying home.

There are equally persuasive, alternative explanations for both bits of evidence. If Modi and his party are fighting like their backs are to the wall, that’s probably because they always fight like that. BJP politicians would battle as fiercely to win a two-thirds majority in Parliament as they would if they were in danger of losing all their seats. A take-no-prisoners approach to elections is the secret to their success.

As for turnout, it isn’t surprising that fewer people are voting this time around, especially if supporters feel the prime minister needs no help to cruise to victory. India is in the middle of a murderous heat wave; I would be more ready to blame climate change than disillusionment with Modi for the low numbers.

Finally, even if the BJP were in trouble — and, once again, we have no real evidence that it is — the outcome of the election will almost certainly have less of an impact on the markets than many seem to think. Unlike, say, former US President Donald Trump, Modi doesn’t look to market performance to gauge his success in power. Traders love the prime minister; that doesn’t mean he loves them back.

Indeed, the truth is New Delhi doesn’t care much what Mumbai, the financial capital, thinks. Finance Minister Nirmala Sitharaman has explicitly said Modi’s government prefers to “leave [the markets] to their wisdom.” It’s precisely because Shah’s intervention was so rare that it was newsworthy.

Nor is it the case that previous coalition governments led by Modi’s rivals have been bad for share prices. When a shaky coalition run by the Indian National Congress won in 2004 — after that topsy-turvy election campaign — markets crashed. Then, as London School of Economics professor Maitreesh Ghatak and his co-authors have pointed out, during the 10 years that government was in power, Mumbai’s Sensex share index rose by 8.3 per cent a year after controlling for inflation, compared to 0.5 per cent annually during the BJP-led government that preceded it.

In other words, markets are jittery because they don’t know enough, not because they know something the rest of us don’t. And what they think they know is probably wrong anyway. Indian politics is complicated enough to predict without throwing stock prices into the mix as well.