The most significant message so far — significant also because it arises out of a near unanimous inference — is that the stock markets are betting on an NDA government, headed by Narendra Modi.

The behaviour of the financial markets — stock and foreign exchange markets — at the time of elections has been analysed at several forums. Now that the actual dates for the elections have been announced, the markets are coming under scrutiny every day. Messages are sought to be read into market movements, whether they are tenable or not.

The most significant message so far — significant also because it arises out of a near unanimous inference — is that the stock markets are betting on an NDA government, headed by Narendra Modi. In fact, so convinced are the markets about this outcome that they have started looking beyond election results and even government formation. The belief that an NDA government under Mr. Modi would be ‘business friendly’ unlike the UPA in its two spells has so permeated the thinking of analysts and even lay observers that they are, at this stage, blithely ignoring the several imponderables during and after the elections.

Several imponderables

Even assuming that the NDA coalition comes on top, will it be able to cobble up at least a working majority? Will there not be differences among the coalition partners on specific issues, including those that are perceived to be market-friendly? And, talking specifically of Mr. Modi and his USP (unique selling proposition) of good governance in Gujarat, how much of this will count at the national level? Also, this election, like all previous elections, is not a presidential election as in the U.S. The leader may be perceived to have the right attributes. But it will be the coalition’s strength and cohesion that will matter.

One final thought - on a subject that will be revisited several times — can any coalition break fresh ground and radically move away from existing policies? And, talking of policies, the BJP has not exactly been pro-reform all the way. It might be due to complete breakdown of political consensus among the leading parties, but the BJP has voted against some important reform initiatives of the UPA. For instance, the opening of multi-brand retail to foreign direct investment (FDI) has been bitterly contested by the BJP. However, it was one of the party’s pro-market initiatives when in power.

Even assuming that as a coalition leader, the BJP will be able to backtrack and sponsor such reforms — a cynical audience might barely notice the change in stance — there are other areas where it will not be able to change course. Land acquisition legislation, for instance, will inflate the cost of many projects to uneconomic levels. Yet, they are seen to be farmer-friendly (they part with the land). No political party can be expected to oppose such legislation. Similarly, can the NDA come to grips with the ever escalating minimum support prices of rice and wheat — one of the principal reasons for the high food inflation?

On March 10, the Sensex and the Nifty scaled new highs, touching life time highs of 22,023 and 6,561, respectively. The markets have remained buoyant. Indian stock indices have outperformed those of other emerging markets. The rupee has been stable after touching a seven month high of 60.80 to the dollar. While it would be futile to pinpoint other factors — besides the expectation of a friendly government — India remains the flavour of the season. Foreign institutional investors (FIIs) have been pouring money into Indian stocks. The phenomenon of financial markets running ahead of economic fundamentals is not new to India. The Modi factor is the main reason this time, even burnishing some insipid macro-economic performance.

Growth remains subdued

The consensus estimate of GDP growth for 2013-14 is below 5 per cent. Many analysts, however, see in the low growth figures signs of the economy bottoming out. The implication is that it can only go up from now on. Indeed a number of forecasters, including the IMF and the World Bank, think the economy will fare better during the next year. Than there are some pieces of good news at last. The current account deficit has come down sharply, and there is substantial progress regarding fiscal deficits, even if the process of consolidation leaves a lot to be desired. None of these, however, explains the puffed up stock market valuations. The Modi factor alone can provide the answer.