State Elections 2023: Its political outcomes will impact the economy and markets

The fact that this round of elections is held so close to Lok Sabha polls makes their results bound to have a psychological impact on general elections.

The bugle for state elections 2023 has been blown with the Election Commission announcing the schedule for the five states on Monda. These elections are being touted as the semi-finals to the grand finale in 2024.

While state and national elections are contested on different issues, and the correlation between state election results and national election results is weakening, the fact that this round of elections is held so close to Lok Sabha polls makes their results bound to have a psychological impact on general elections.

In December 2003, BJP won the three state elections of Rajasthan, Chhattisgarh and Madhya Pradesh, but went on to lose the general elections in 2004.

In December 2018, BJP lost these states to Congress, but won emphatically in general elections 2019.

State Election Results & Markets: Poor Correlation

Normally state election results do not have any significant impact on stock markets as state governments do not decide the economic policies of the country, their role limited to state budgets.

An analysis of market movement on the day of election results for these states in the last four cycles from 2003-2018 shows no clear pattern. Sensex closed marginally upwards even when BJP lost all states in 2018. Similarly in 2003 when it swept all the three states, markets ended flat.

In 2008, the Congress could only win Rajasthan, while the markets gained 2.2%, perhaps hoping for a BJP return to power in 2009. In 2013 when BJP swept all these states, markets showed a thumbs up gaining 1.6% in hope of a Modi victory in 2014.

But 2023 Could Be Different

2023 is different from the 2018 elections in many ways. In December 2018, Congress stumbled upon winning three states. It got just three months to carry forward the momentum from those wins, which was negated completely by the Balakot airstrikes.

In 2023, the formation of the INDIA bloc negated the TINA factor to an extent. Additionally, Congress party’s victory in May in Karnataka has given it and its allies ample time to gain traction for their economic model and their idea of India for the past five months.

A victory in even half of the four major states which go to polls could create an environment where the INDIA bloc is in contention in 2024 and this could have an impact on markets as Congress has made social justice and social welfare as its poll planks.

Economic Impact Of Starkly Different Development Models

The party’s five guarantees: (i) cash dole to women (ii) financial support to unemployed youth (iii) farm loan waivers (iv) subsidised cylinders and (v) free electricity up to certain units along with implementation of OPS - will require significant resources. This could end up putting pressure on finances of these states and potentially the Centre if they come to power.

Excessive welfare spending may be looked at with scepticism by the markets. The Karnataka guarantees alone are expected to cost the exchequer Rs. 50,000 crore as per estimates.

As the economy turns out to be a pain point for the BJP, with unemployment and inflation topping the charts of issues across these states, the party too is responding as some would argue with freebies.

The Ladli Behna Yojana launched by Shivraj Singh Chouhan and Centre’s recent decision to increase the subsidy to Rs. 300 per cylinder under Ujjwala Yojana are examples. The PM Kisan Nidhi amount could also be increased. Poorly directed freebies flag risks for the health of an economy.

BJP’s economic strategy focuses on infrastructure which leads to job creation having a multiplier effect on the economy, a top-down approach. INDIA bloc seems to be batting for a bottom-up approach, supporting the poor through schemes and cash doles. This could have an impact on funds allocated for infrastructure creation.

The results of the state elections could provide hints about voter’s inclination towards parties' economic agenda. This, in turn, could have far reaching consequences on the country's economic growth and stock markets in the near term up to May 2024 and perhaps even beyond, which of course will depend upon how much these state polls impact the general elections.

Amitabh Tiwari is a former corporate and investment banker-turned political strategist and commentator. Twitter: @politicalbaaba. Views are personal, and do not represent the stand of this publication.