There’s a reason why the Indian stock market seems to be favoring the Bharatiya Janata Party.

Of course, there were some wobbles along the way, and India’s most famous stock index, the S&P BSE Sensex, saw some big swings during the day. However, since April, the difference between the Sensex’s highest point of 75,124.3 points and its lowest point of 71,816.5 points has been 4.4%, which is not that big considering the history. Also, on May 17, the Sensex index closed at 73,917 points, 1.6% below its highest level since April, when elections began to come into focus.

The thing to remember here is that the parts can behave differently than the whole. And that seems to be happening in the stock market as well. Simply put, stock market investors can be divided into two broad categories: Foreign Institutional Investors (FII) and Domestic Institutional Investors (DII).

Since April, FIIs have been net sellers of equity value. INR369.1 billion, or approximately $4.4 billion. During the same period, DII purchased a significant amount of equity on a net basis. INR781.6 billion. In addition, DII has bought up the value of the stock. INR339.7 billion in May alone.

DIIs are institutions such as insurance companies, mutual funds, provident funds, and banks that invest money collected primarily from individual investors. Additionally, DII investments include funds coming in through systematic investment plans in equity investment trusts and investments in government investment schemes such as the Welfare Provident Fund and the National Pension System.

Therefore, retail investors in India generally seem confident that current measures will continue beyond June 4, when India’s parliamentary election results are announced. Also, FIIs as a whole seem to have very slight doubts whether the BJP-led National Democratic Alliance (NDA) will be able to win the same confident mandate that he won in 2019. As a result, it is sold net. FIIs held approximately $794 billion worth of Indian stocks at the end of April.

Nevertheless, what is clear is that both FIIs and DIIs want the BJP-led NDA to continue ruling the country beyond June 4. This leads to the next question: Why does the stock market like the idea of ​​a Bharatiya Janata Party-led NDA government? Since 2016, the government has been working to promote regularization of the Indian economy through moves such as demonetisation and Goods and Services Tax (GST).

This was followed by a reduction in corporate tax rates in September 2019, with listed companies benefiting through increased sales, tax cuts and higher profits due to the pandemic’s devastating impact on the informal sector. I did.

Data from the Indian Economic Monitoring Center for over 5,000 listed companies shows that from 2018-19 to 2022-23, the net sales of these companies increased by 52%, while the corporate tax paid increased by only 36%. This suggests that net income has increased significantly. Increased by 187%.

By comparison, between 2014-15 and 2018-19, net sales increased by 30%, corporate taxes increased by 38%, and net profit in 2018-19 was about 90% higher than that in 2014-15. %was. In particular, it is clear that tax cuts increase profits for listed companies and push up stock prices. Of course, it also helped that central banks printed tons of money after the pandemic hit.

These dynamics seem to have worked out very well for stock market investors over the past few years. And now, there seems to be a small fear, at least among FIIs, that those happy days will disappear unless the Bharatiya Janata Party-led NDA is re-elected. If an opposition-led coalition is elected, fiscal spending will be increased by government spending. Major plans set out in their manifesto.

Furthermore, if governments choose to finance increased spending through widening budget deficits (the difference between revenue and spending), this is likely to lead to higher interest rates and crowding out of investment. If we choose to increase tax collections, one obvious option would be to raise corporate taxes.

The government will not want to increase the GST rate because it will be unpopular. Personal income tax collections have already increased considerably. In 2018-19, it was only 2.44% of gross domestic product (GDP), but it is expected to rise to 3.42% in 2024-25. Corporate tax was 3.51% in 2018-19 and is expected to rise to 3.18% in 2024-25.

Therefore, any additional spending will likely be financed by higher corporate tax rates. This idea will be easy to sell to the public. Unless a company’s sales grow faster, this means lower profits, and lower profits usually mean lower stock prices.

Now, most individual investors probably haven’t thought about this in detail. Then you will probably come to this conclusion. Institutional investors are probably already doing that, though they won’t say it publicly. Indeed, the stock market is a weighing machine of the future, but like anything else, it is conditioned to think only in terms of its own incentives.