Do Politicians Matter

The other day, while I was chatting with an old student of mine, he asked me whether we should factor general elections while doing valuation. Every 5 years we go to election. Why do not we factor that while projecting the free cash flows.

My immediate reaction was that since this is something we cannot predict, we should assume that free cash folows do not depend on general elections, that is they are politics-neutral. I am strongly of the opinion that it really does not matter who is there in power. If you are a businessman, you bribe whoever is in power to get your work done. If you are a normal citizen, you bribe the government officers and police for getting the work done (paying to the police when he comes for verification for passport, etc. You name it and we have it :)

So why should we care who comes to power. But should we? I just wanted to see how Indian economy was performing under different regimes here. I started from the 7th Lok Sabha election and tried to look at the performance of our stock market and the GDP growth rates during this time period. I thought there would be no difference.

I have not seen anybody doing this type of research before. So I used a methodology similar to event study here. To explain: Let's assume that the stock market has increased by about 214% when the current UPA government was in power. How much of this is due to UPA? Stock markets worldover were increasing at this time. So I also found the US market's stock performance during the same time. I attributed the difference between the Indian stock market growth rate and the US stock market growth rate during the last five years to the UPA government. Ditto for GDP growth rate.

Secondly, the non-congress governments lasted for less than five years in 3 out of 4 times they came to power. So I compared the performance on a year-wise data.

As far as the GDP growth rate (defined as the Indian GDP growth rate minus the US GDP growth rate during the same time period) is concerned, I found that the difference in performance is marginal (10.9% for Congress vis-a-vis 8.3% for Non-Congress parties). However, as far as the stock returns are concerned (defined the same way as for GDP) the difference in performance is spectacular (23.59% for Congress vis-a-vis a negative 1.2 % for the non-Congress). Either Congress is plain lucky or the stock market seems to like the policies of the party (which some way does not get reflceted that clearly in the GDP growth rate).

Yet to do a robust study of the results. These are just the preliminary results. The GDP story tells me that the free cash flows probably remain a bit high when Congress is in power. But the stock markets tell me a different story.

When a party goes to power, it is not that its policies stop having impact on the overall growth rate. If, for example, a different party comes to power now for the 15th Lok Sabha, then the policies made by UPA Government will still have impact on the GDP growth rate post April 2009. But over a long time period, that should get averaged out.