India is the biggest democracy in the world, and all eyes are always on the country during its election phase. As India just finished its elections, you may have seen how big of an event it has become, especially for investors who become anxious, as elections highly impact the overall trend in the stock market. However, experienced investors do not become anxious or panic as they deeply understand the impact of an election and how a specific type of government formation can impact their investments. If you are a stock market investor, it is important to understand the impact of elections and the resulting government formation on the stock market.

This blog will help you learn about the positive impact of a coalition government on the economy and how you can adjust your investments accordingly during elections.

• A coalition government is formed when numerous political parties come together to form a government due to lack of a majority.
• India has witnessed numerous coalition governments, such as the United Progressive Alliance (UPA) and National Democratic Alliance (NDA) coalitions.
• Understanding the positive impact of a coalition government on the economy can help you improve your investment strategy during election time.

A coalition government is formed when multiple political parties join together to govern because no single party has secured an outright majority in the legislature. It is formed after extensive discussions between political parties that have won a specific number of seats but need more seats to form a government as per the Indian constitution. Parties in the coalition share executive responsibilities and ministerial positions are distributed among the different participating parties. Since India has a complex political structure with numerous parties, coalition governments are common at the central and state levels. Some examples are the United Progressive Alliance (UPA) and National Democratic Alliance (NDA) coalitions.

Here are some myths and their contrasting facts to help you understand the positive impact of a coalition government on the economy:

Myth 1: Reduced market returns

It is a common myth that the stock market collapses if a coalition government is formed. However, historical data says otherwise. A coalition government was formed in 2004 and ruled until 2009, when Congress was the biggest party with 145 seats. In contrast to the myth, the stock market rose by a staggering 115%. Furthermore, with UPAs second term from 2009-2014, Nifty doubled in its value.

Myth 2: GDP growth slows down

Another common myth is that if a coalition government is formed, GDP growth will slow down. GDP (Gross Domestic Product) is the total monetary value of all goods and services produced in India over a specific period. If you look at the historical GDP values during UPA 1 (2004-2209), the GDP growth was over 8%. On the other hand, the GDP growth was 7.5% during the next coalition government of the UPA (2009-1014). Although other market factors affect the GDP growth in India, the last 15 years have shown that the impact of a coalition government has been positive for the Indian economy.

Myth 3: There are no reforms

A common myth that arises after a coalition government is formed is that a coalition government does not pass new reforms as there is always a conflict between multiple parties and their leaders. Every coalition government in India has passed a major reform, starting from the 1991 liberalisation policy by the then Finance Minister Manmohan Singh. This reform is considered the most impactful in taking India to its current economic position. Furthermore, the current taxation system was passed by a coalition government in 1998. Lastly, the NDA government, under the leadership of Narendra Modi, passed unprecedented reforms such as demonetisation and GST, which have shaped India's current economic environment.

Myth 4: Businesses earn less

One of the most considerable myths about the formation of a coalition government is that business earnings are negatively impacted. However, the historical data on how Nifty has performed during coalition governments says otherwise. During UPA 1, Nifty rose at a CAGR of 18%, while during the UPA 2 term, it rose by 10%. Furthermore, corporate earnings witnessed double-digit growth under both coalition governments.

In India, coalition governments are common; in the last few decades, three have formed and positively impacted the Indian economy. Currently, India is the fastest-growing economy, and its GDP growth has resulted from the reforms launched by the leaders of the coalition governments. Now that you know the positive impact of a coalition government, you can better review your portfolio and make necessary adjustments if you believe a coalition government may form after an election.