India’s Elections 2024: Modi 3.0

Market Reactions and Elections Outcomes

It has been a rollercoaster for India’s 2024 elections (see chart below). The Nifty index, a benchmark for the Indian stock market representing the weighted average of 50 of the largest Indian companies listed on the National Stock Exchange, experienced significant fluctuations before closing at a new all-time high. This surge followed the confirmation of a third term for Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) coalition government.

Bron: Econopolis, LSEG Datastream

The market reaction around the Indian elections was fascinating. On Tuesday, June 4, Indian stocks experienced their worst intraday fall since March 2020, as vote counting suggested Modi’s ruling BJP might fail to secure an overall majority on its own. This outcome contradicted exit polls, which had indicated that the BJP might achieve a two-thirds majority. However, over the next few sessions, Indian stocks surged as the BJP-led NDA formed the government, recouping losses triggered by the unexpected election result.

Early analyses of the BJP’s disappointing performance suggest that the party’s lack of focus on immediate stress points, such as rural incomes and support, contrasted with its long-term, capex-driven industrialization policy. While the latter has been positive for the economy and remains structurally important, it may have contributed to the electoral setback. Historically, elections have caused sharp market movements, but markets typically stabilize within one to six months after such events. According to sources from SBI Securities, data from the past 20 years shows that while governments come and go, stock markets chart their path with direct linkage to the corporate earnings cycle.

Modi and the NDA: Returning to Power in Coalition

Modi’s success as a political power and prime minister has largely been based on securing a single-party majority (more than 272 seats) since 2014. This time, however, he won only 240 seats (compared to 302 seats previously) and needed to form a coalition with the NDA, which consists of several right-wing, conservative regional parties, to form the government. Together they have won 290 seats, falling short of the 400 seats they had projected.

Many believe that this outcome is beneficial for democracy, given the polarization Modi has brought to the country and politics. He has been accused of pushing laws through parliament without sufficient discussion and debate, as well as “ostracizing” the 200 million Muslim population (15% of the total) who, despite being a minority in India, represent the third largest Muslim population outside of the Middle East.

From an investor’s perspective, Modi’s single-party majority government, which enabled a centralized decision-making process, was seen as advantageous. The recent election results are viewed negatively in this regard. Over the past 10 years under Modi, the Nifty index has outperformed the S&P 500 by 61 percentage points in local currency terms. This outperformance was significantly aided by China, particularly post-COVID, as the “Xi Risk” strategy led to many supply chains moving into India and ASEAN. Modi’s policies have propelled India to become the 5^th largest economy through boosting GDP per capita and massive infrastructure spending.

However, there are concerns that populist pressures on the government have increased, given the loss of the majority in the recent elections. There are worries that budgetary resources might be diverted from long-term programs to appease and aid rural India. While these concerns are valid, there are indicators suggesting that very little will change and the capex will continue, even if rural subsidies increase.

Policy Continuity and Cabinet Retention

As Modi was sworn into office, the return of familiar faces in the union cabinet brought a “modicum of stability” to the policy discourse, a development welcomed by the markets. Modi has retained the ‘Big 4’ ministers: Rajnath Singh (Defense), Amit Shah (Home), Nirmala Sitharaman (Finance), and S. Jaishankar (External Affairs).

In addition to the Big 4, Modi’s core team of ministers have also retained their portfolios: Nitin Gadkari (Road Transport and Highways), Piyush Goyal (Commerce and Industry), Dharmendra Pradhan (Education), Sarbananda Sonowal (Ports, Shipping, and Waterways), Virendra Kumar (Social Justice and Empowerment), Ashwini Vaishnaw (Railways, Electronics, and Information Technology), Hardeep Puri (Petroleum and Natural Gas), and Bhupender Yadav (Environment, Forest, and Climate Change). Some of these ministers have shed additional portfolios that were assigned when others left the council of ministers in the past.

The retention of these key ministers provides policy continuity in one of the world’s fastest-growing economies. It also reflects Modi’s confidence in their abilities as the Modi 3.0 government begins its new term.

India’s Economic Outlook Post-Elections and Beyond

As expected, following the election results, the Reserve Bank of India (RBI) has kept its policy rate unchanged at 6.5% for over a year now, despite growing calls for rate cuts. The RBI remains optimistic about the country’s economic growth, which is inching toward a sustained 8%, but maintaining control over inflation is essential. The RBI is confident in its 7.2% growth projection for the current financial year, an increase from the earlier forecast of 7%.

Additionally, the 5% Minimum Support Price (MSP) hike for paddy (rice), a key summer crop, aligns with the average hike over the past decade. This indicates that the coalition government has not adopted a populist stance post-election. The MSP aims to protect farmers in India from market and natural uncertainties. The government has announced that MSP purchases will be worth approximately Rs 2.0 trillion for the summer crop, an increase of about Rs 0.35 trillion year-on-year (10 basis points of GDP), which is not a significant boost to rural income. The MSP hike for rice and pulses is below the current food CPI increase of 7.9% and should be seen as disinflationary. Consequently, the government is unlikely to deviate from its capex push, with a 17% capex growth projected in the FY25 interim budget. Part of the fiscal headroom from the RBI’s large dividend could be directed towards further boosting capex spends.

Despite recent budgetary constraints, India’s capex has doubled, and strong political intent suggests the capex program will continue. India’s infrastructure has significantly improved in recent years, with ample scope for further enhancements through government initiatives like the National Master Plan for Multi-modal Connectivity, a $12 trillion megaproject. Efficient infrastructure can reduce logistical costs and enhance India’s manufacturing competitiveness. Notably, there is strong evidence of a revival in India’s railways, which are economical and environmentally friendly. Increasing rail freight share would reduce logistical costs and boost India’s global manufacturing competitiveness.

The BJP-led NDA retaining its majority is crucial for policy predictability, which equities tend to favor. India’s newfound macro stability, a likely decrease in the primary deficit, a growing domestic equity savings pool, improving social equity, a rapidly evolving deep tech sector, an impending loan boon, and shifts in external dynamics could drive 20% annual earnings growth over the next five years, according to Morgan Stanley forecasts. Morgan Stanley also expects India to contribute one-fifth of global growth in the coming decade. This projection is based on India’s growing role as the back office and factory to the world, a burgeoning consumer class empowered by a digital economy, and a transition to green energy. The stock market gains indicate that the India story has many more drivers, with the country’s economic upcycle likely to continue in the long term due to factors such as a rising middle class and strong demographics.

There are several risks for India’s equity market to navigate, even with the elections behind it. The country faces capacity constraints in the bureaucracy, the judiciary, healthcare, education, and skills training. Additional risks include geopolitics, the impact of AI on the tech industry, low productivity in the farm sector, climate change, and a lack of adequate factor reforms. Moreover, a substantial global growth slowdown could negatively affect India’s growth and funding.

There are several risks for India’s equity market to navigate, even with the elections behind it. The country faces capacity constraints in the bureaucracy, the judiciary, healthcare, education, and skills training. Additional risks include geopolitics, the impact of AI on the tech industry, low productivity in the farm sector, climate change, and a lack of adequate factor reforms. Moreover, a substantial global growth slowdown could negatively affect Inda’s growth and funding.