The National Democratic Alliance (NDA) coalition has won the 2024 Indian election, with prime minister Narendra Modi set to secure a third term in power.
His party, the Bharatiya Janata Party – which forms the lead partner of the NDA coalition – was unable to maintain its single party majority, however, having won 241 seats compared to the 303 won in 2019.
After hitting an all-time high off the back of strong exit polling in favour of the BJP, the Sensex index of Indian stocks fell 8.24% as the narrower-than-expected result came to light on Tuesday before regaining some ground.
“This reduces the dominance of the BJP and essentially highlights the formation of a weaker alliance government in the offing,” says Gaurav Narain, manager of the India Capital Growth fund.
“While we expect policy continuity, with the Government continuing its investment led economic agenda, it may tweak priorities to support rural consumption and employment.
“A challenge the new government would however face is that it would need support from its coalition partners in decision making. This would constrain it in making bold reforms – particularly in areas of agriculture laws and labor reforms. It may also steer away from contentious issues like implementing a uniform civil code.”
“From a market perspective, we expect a stronger focus towards demand revival in rural India, benefitting consumption stocks. The investment led stocks, particularly the Public Sector Unit (PSU) could see some pull back.”
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Narain adds that a positive outcome of the election has been that it strengthens India’s democratic credentials. Ahead of the elections, there were allegations that the Modi government was influencing the outcome of the elections, and fears that an even stronger third mandate for the NDA alliance may give it too much power with speculation they would make constitutional amendments, questioning the secular nature of democracy.
Building on this point, Will Scholes, fund manager at Premier Miton Investors, believes a weakened majority is good news from an ESG perspective.
“For all that Indian markets today are signalling alarm, a weaker win for the BJP is good news for India,” he says. “It’s a sign that a centralised growth model will have to de-centralise, that the rapid rise in inequality and the over-used politics of religion must be slowed, and the government will have to tread a more inclusive path going forward. India’s economy has been doing well through a period of turmoil round the world, helped by major digital and physical infrastructure advances.
“But, still the most fundamental reform remains unaddressed: to provide jobs at scale to the bottom of the population pyramid and move people out of agriculture and into employment where they can accumulate skills and savings. For too long the population has been pulled up from the top, not pushed up from the bottom. Today’s vote count offers the perspective that great economic strides forward cannot make up for politics that have become too strident.”
Worst-case scenario avoided
For Abhinav Mehra, portfolio manager at Chikara Investments and co-manager of the Chikara Indian Subcontinent fund, the biggest takeaway from the result is that the perceived market risk of a hung parliament or the spectre of another election is now over.
“While the BJP was unable to reach a majority alone, they still managed a comfortable majority with their core allies which means that we should see a continuity of government and PM Modi. This may have been a political shock, but it bodes well for Indian equities, especially the domestically focused stocks we invest in. Domestic consumption stocks have been the best-performing pocket of the market since the results.
“We believe the new government is likely to counter the narrative that a rural slowdown in UP and Maharashtra hurt their prospects in the election by focusing more intently on ensuring domestic growth and consumption keeps growing. Oil prices back below $80 creates the room for this near-term stimulus boosting consumption and credit growth. This may come at the cost of market areas reliant on aggressive infrastructure roll outs, where we’re likely to see expectations tempered.
“Longer term, we may see an increased volatility in the next 5 years than in the previous term. We believe economic reforms – the most challenging of which, in our view, were implemented in their first term (2014-2019) – will be prioritised, with that the more disruptive socially divisive reforms (i.e. Uniform Civil Code, One Nation One Election) put on the backburner.
“As long as the strong growth rate from the positive capital cycle continues undisrupted, the long-term outlook of Indian equities remains robust – especially compared to so many economies that are highly levered and ageing. Against this backdrop, many would envy India’s fundamentals of more than 8% GDP growth, a clean banking system driving a cyclical uptick in credit and property, stable inflation and a macro environment with pockets of reasonable valuation across the market.”
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Long-term investment case intact
Jason Hollands, managing director of Bestinvest, said that despite the narrower-than-expected result, the long-term bull case for India remains intact.
“From an investor perspective, the BJP is business friendly and under Modi’s tenure the country has undergone meaningful, structural reforms as well as making huge strides in modernising its infrastructure. Notable measures have included digital transformation of the welfare system which included implementing the world’s largest biometric ID system, streamlining a patchwork of state taxes into a national Goods & Service tax, flushing out money in the black economy by replacing notes in circulation, liberalising Foreign Direct Investment rules across a number of sectors (including defence, aviation, and retail) and other measures that have much improved India’s competitiveness.”
“With another five years in office likely to be secured, investors will be hoping for a continuation of the drive to modernise India and attract foreign investment under the banner of the government’s ‘Make in India’ initiative,” he adds. “Key themes in the BJP manifesto included extending access to welfare, job creation and further infrastructure investment, an example of which are plans to extend the reach of high-speed bullet trains.
“For private investors, India is simply too big an opportunity to ignore. Over the last decade, it has climbed the global rankings from being the 11th largest economy to fifth place. The International Monetary Fund, estimates India will see real GDP grow by 6.5% this year, outpacing all other major emerging market and advanced economies. Modi’s pledges include expanding India’s GDP to $5trn by 2027, which would make it the world’s third-largest economy.
“India has certainly been a bright spot amid a tough period in recent years for emerging market equities which have been dragged down by the ugly performance of Chinese shares since early 2020.”
