DUBAI: The 16th general election will be India’s most expensive. According to some estimates it is likely to challenge even the $7 billion record amount spent during the last US presidential election.

On the positive side, the spending will actually give a Rs600 billion (Dh37.5 billion) stimulus to the country’s GDP, according to industry body Assocham’s study.

The general elections are held every five years. This great Indian electoral exercise to appoint a new government is colourful, energetic, and peppered with big promises and both bad and good jokes as well as silly antics from various leaders, all of which are on display. It’s also even noisier than usual this time.

Not only Indians and Indian investors but also foreign investors are closely tracking this milestone in the world’s largest democracy, which happens also to be one of the largest economies among the emerging countries, but one that has seen its growth slide in the last two years.

In the months leading to the elections, foreign brokerages such as Nomura, Goldman Sachs, UBS and Bank of America Merrill Lynch have indicated their preference for a government led by Narendra Modi, the prime ministerial candidate of the main opposition party the Bharatiya Janata Party (BJP). He is perceived as pro-reform and investor-friendly.

An opposition victory

The latest opinion polls in India predict an opposition victory, though the tally shows BJP some distance away from a clear majority on its own. That could throw up a few days of confusion and uncertainty immediately after the announcement of the final results on May 17, before the likelihood that BJP ties up with political parties to form the National Democratic Alliance (NDA) government. All opinion polls are clear about one thing: it will be a major loss for the incumbent Congress-led United Progressive Alliance (UPA).

Financial markets like certainty, and in electoral terms that means a party winning a clear mandate. Five years of stability would be welcome, based on consistency in policymaking unaffected by the whims and fancies of coalition partners lacking ideological common ground. A whiff of ambiguity on government formation is liable to send the market on a downward slide, at least in the short term.

Analysts differ on how much gain the markets could witness in the event of BJP and its allies winning the required seats to form the next government.

“A BJP and its allies winning 272 seats could translate into a euphoria resulting in a huge rally,” said Gaurang Shah, the Mumbai-based vice president of Geojit BNP Paribas in an email response.

He does not rule out the indexes hitting upper circuit, that is, a 10 per cent jump, the limit set for S&P’s BSE Sensex. Sectors that would be in focus, Shah said, include power, infrastructure, capital goods and engineering, given the model pursued in Gujarat (the state of which Modi has been the chief minister for the past three terms).

Much more conservative in his expectation is Rakesh Tarway, the vice president and head of equity strategies, equity and derivative products at Mumbai-based Motilal Oswal Securities Limited.

The gains would depend on how much the indexes have climbed by the day of election results. Exit polls could already sway the markets positively even before the actual tally comes in, he suggested.

In the immediate aftermath of a Modi win, “there could be a 3-5 per cent move in the index, provided the Nifty [the other Indian index] has not moved beyond 6,800-7,000 before that itself”, Tarway said.

“Modi [would] be positive for the market in the immediate term, but the market is discounting the possibility fairly. [The foreign institutional investors] will prefer a reformist, decisive government, which is a pitch Modi is using [in his campaigns].”

Banks and infrastructure sectors are expected to outperform, he added.

Some analysts such as Anil Rego, a Bengaluru-based chief executive of financial investment services firm Right Horizons, say the indices could see one-day gains of around eight to 12 per cent or even higher, and 15 per cent to 20 per cent on individual frontline stocks.

Others are less sanguine.

BJP and its allies sweeping to power coupled with strong corporate earnings this quarter would mean that the Sensex could easily cross 25,000 points, said Pradeep Unni, the head of trading and research at Dubai-based brokerage Richcomm Global Services. As of March 20, it is close to 22,000. “That will be swift, provided there are no external surprises,” he said.

The market views the other two outcomes as less favourable.

An inconclusive verdict -- where the federal or third front, backed by a battered Congress, is able to manage a majority, or the AAP bargaining its way to the top job in the country -- would not augur well for the markets, analysts said. They argue that it would turn off foreign institutional investors (FIIs), who have been net buyers for the past few years. As of mid-March, overseas investors hold stocks worth Rs5,193 crore ($837.58 million), indicating they are pretty bullish on the Indian markets.

Almost all analysts agree an alternative front with outside support from the Congress would be the weakest outcome, as it would be too unstable to survive beyond a few months.

In such a case, Right Horizon’s Rego expects markets to correct by five to 10 per cent, and remain lacklustre for several months, while Shah of Geojit BNP Paribas predicts a sharp downslide in that event.

“One cannot rule out another election in the next three to six months, and, needless to say, equity markets will be heading south until matters settles down and some clarity emerges,” he said.

“This [outcome] is something that no one possibly wants,” Unni said. “Another five years of policy stumbling [if it lasts] and unstable government would possibly mean India and its investments [being] downgraded to junk status by major credit rating agencies.”

The current strength in stocks and currencies, he said, clearly signal that no one expects such a scenario. If it somehow does happen, markets would fall “between 10 to 15 per cent”, he said.

In the immediate aftermath of a third front or, for that matter, Arvind Kejriwal and his AAP coming to power with the support of other non-BJP parties, markets might fall eight to 10 per cent.

That would be 5,600 points at Nifty (from current levels), said Tarway of Motilal Oswal Securities, adding that financial stocks might lag, though some defensives such as pharmaceutical, information technology and consumer goods are likely to do well.

Others are discounting Kejriwal coming to power as the nation’s leader. “I don’t believe [he] can become prime minister this time, as [AAP] is new and they [appear] to have no national agenda,” Shah said.

Elections have thrown up surprises, though, and if this remote possibility does become a reality, it would be equally detrimental as the second outcome, some analysts say.

“If [Kejriwal] does become PM,” Shah said, “there would be an immediate knee jerk reaction and markets could be heading down.”

The outlook of AAP remains fairly populist and not so business-friendly, according to Rego.

“This could be a negative for the markets in the short term,” he said. “However, over the medium term it’s very difficult to say what direction the markets would take, due to lack of policy clarity from the AAP side.”

The Kejriwal or the third outcome, though not much different from the second outcome of a UPA coalition, is better, according to Unni.

“Markets will be unhappy, but [they] are less likely to see a big sell-off, hoping that the new government could possibly do good,” he said.

“Heavyweights such as Reliance [which the AAP has targetted along with Adani group, both for receiving alleged favours from governments], and a few government-controlled stocks, will possibly decline on the fear of charges being pressed against them,” Unni feels. “It’s difficult to predict anything in this scenario. The chances of politics being cleansed [are] positive, but how far the markets [pick] this up remains to be seen.”