Policy and politics on the index: Markets rise on reforms, stable rule

Market returns are better under governments with clear and stable majorities and rise when major reforms are announced

The Sensex, the 30-share equity benchmark launched in 1986, has been a mirror of India’s economic landscape for 40 years. The index’s changing composition mirrors India’s transformation from a heavily regulated economy, dominated by a handful of industrial houses, to a liberalised market with genuine sectoral diversity. It also reflects the policy shifts during these decades and their impact, right from the turbulent 1990s, when P V Narasimha Rao and Manmohan Singh steered the economy out of a crisis and ushered in a new generation of reforms, to the Narendra Modi era, when increasing digitisation and the post-pandemic shift to equities triggered a sustained bull run in recent years. 

Here is how the Sensex has fared under the tenure of various Prime Ministers. 

Chandra Shekhar (Nov 1990 – June 1991) 

Chandra Shekhar’s was the second government of a 25-year phase — later described as the coalition era — when allies could bring down governments. Poor economic management in the preceding years and the Gulf War, which led to a spike in oil prices, pushed India into a severe balance-of-payments crisis. Depleted foreign-exchange reserves meant that India struggled to finance its essential imports. The government even had to pledge its gold reserves to secure a foreign-exchange loan. 

Though the Chandra Shekhar government planned to usher in economic reforms, it could not do so as it lost the backing of the Congress party, which had supported it from outside, and failed to present the annual Budget. The Sensex declined by 2.2 per cent, the second-worst performance under any prime ministerial term.

 

P V Narasimha Rao (June 1991 – May 1996) 

The Sensex gained 181 per cent during Narasimha Rao’s term: The best performance under any Prime Minister. Rao oversaw economic reforms that rescued India from one of its worst fiscal and balance-of-payments crises and put the economy back on track. 

It was an eventful period in the history of India’s capital markets. The market regulator, the Securities and Exchange Board of India (Sebi), was given statutory powers. The office of the Controller of Capital Issues was dissolved, and the power to approve public issues was transferred from the Finance Ministry to Sebi. The private sector was allowed in the mutual fund industry, and foreign portfolio investors were permitted to invest in Indian equities. The National Stock Exchange began operations in 1994, paving the way for the professionalisation of the broking industry. In short, many measures that later enabled robust equity markets were introduced during this period.

 

Atal Bihari Vajpayee (May 1996 – June 1996) 

Vajpayee’s first tenure in 1996 lasted just 13 days, offering little room for policy action. The 1996 Lok Sabha elections had thrown up a hung Parliament, and Vajpayee took the oath of office as the Bharatiya Janata Party emerged as the single largest party, but he resigned when it failed to cobble together a majority within the stipulated period. 

Markets dislike uncertainty, and this short-lived government unsettled investors. The Sensex slipped about 2.6 per cent, driven primarily by political instability rather than economic fundamentals.

 

H D Deve Gowda (June 1996 – April 1997) 

Reform measures continued under the Deve Gowda government, though it was a shaky coalition of 13 parties supported externally by the Congress. One key highlight was the “Dream Budget” presented in February 1997, which reduced corporate and personal income taxes, raised the limit for foreign institutional investment and cut import duties. The Sensex rallied 6.5 per cent on Budget day. 

These reform steps were partly driven by pressure to introduce growth enablers, as India’s GDP growth trailed the buoyancy seen in smaller Southeast Asian economies. The Sensex rose 2 per cent during this period.

 

I K Gujral (April 1997 – March 1998) 

Coalition compulsions meant the Gujral government had limited scope for radical reform, but it upheld the liberalisation process and sustained investor confidence. The Gujral Doctrine — a set of guiding principles for engaging with immediate neighbours — improved relations with other South Asian countries and acted as an indirect sentiment booster. 

A key finance policy initiative was the Voluntary Disclosure of Income Scheme (VDIS), which came into effect in July 1997. VDIS allowed assessees to declare previously concealed income with immunity from legal proceedings. The Sensex rose 0.6 per cent during this period.

 

Atal Bihari Vajpayee (March 1998 – May 2004) 

Vajpayee’s two stints over these six years were marked by the Pokhran nuclear tests, the Kargil war and their aftermath. On the economic front, his government launched the Golden Quadrilateral highway programme, deregulated the telecom sector, and pursued disinvestment of state-owned companies. The Fiscal Responsibility and Budget Management Act ushered in a new era of fiscal discipline, enabling future welfare spending. Despite disruptions from the Asian financial crisis and sanctions following the nuclear tests, the Sensex rose nearly 30 per cent — an endorsement of accelerating GDP growth and improving corporate profitability.

 

Manmohan Singh (May 2004 – May 2009) 

Economic growth gathered momentum during Manmohan Singh’s first term. For the first four years, GDP grew at an average of 7.9 per cent before the global financial crisis dragged it down to 6.9 per cent. Government debt-to-GDP declined significantly. 

Landmark policies included the National Rural Employment Guarantee Act, the Right to Information (RTI) Act, VAT implementation and continued financial-sector reforms. The Sensex surged 180 per cent, driven by robust earnings growth, infrastructure investment and foreign investments, marking India’s arrival as a key emerging-market destination.

 

Manmohan Singh (May 2009 – May 2014) 

Singh’s second term was less impressive, even though average GDP growth stood at 6.7 per cent, with two years recording growth of 5.2 and 5.5 per cent. Corruption allegations, inflation and a sharp depreciation of the rupee following the US Federal Reserve’s taper announcement weighed on sentiment. 

Despite governance challenges, the Sensex gained 78 per cent, supported by global liquidity, corporate resilience and a low base after the global financial crisis. Notably, the market navigated extreme volatility as the currency hit record lows, yet strong domestic institutional support and an eventual recovery in capital expenditures helped sustain long-term investor confidence.

 

Narendra Modi (May 2014 – May 2019) 

Demonetisation in 2016 and the crisis cause by IL&FS, a large infrastructure development and finance group, in 2018 were disruptive and rattled markets. However, the period also saw landmark reforms, including the rollout of the Goods and Services Tax (GST), the Insolvency and Bankruptcy Code, the Make in India initiative, and a renewed push for infrastructure development. 

The foundations laid for the digitisation of the economy and seamless transfers later proved pivotal to the post-pandemic equity boom. The Sensex rose 61 per cent, reflecting optimism over various structural reforms, though punctuated by some bouts of volatility.

 

Narendra Modi (May 2019 – June 2024) 

This phase spanned the Covid-19 pandemic, global supply shocks and inflationary pressures. India responded with structural reforms — labour codes, the production-linked incentive manufacturing scheme, aggressive public capex spending, and banking-sector strengthening. 

A confluence of digital infrastructure, Aadhaar-enabled onboarding, cheap data, smartphone penetration and pandemic-driven behavioural shifts triggered an unprecedented retail-investor boom. The growth of discount brokers and a sustained promotion of mutual funds reinforced this trend. The Sensex gained a remarkable 107 per cent, driven by domestic liquidity enabled by the deeper financialisation of savings and post-pandemic margin expansion.

 

Narendra Modi (June 2024 – Ongoing) 

This tenure so far has been characterised by weakening corporate profits and uncertainty over an Indo–US trade agreement following President Donald Trump’s imposition of 50 per cent tariffs on Indian goods. The government has responded by cutting personal income tax rates and rationalising GST, while the central bank has implemented rate cuts to boost economic activity. Earnings growth is expected to gather momentum in the coming quarters.