How India's election could affect future investments and reforms

Investors set to reassess the economic outlook under the new political landscape, analysts say

An electronic stock market board in Mumbai. Indian stocks edged a bit higher in early trade on Wednesday after posting their biggest drop in four years on Tuesday. Reuters

With Indian Prime Minister Narendra Modi and his Hindu nationalist Bharatiya Janta Party failing to secure the landslide victory that many investors had priced in, concerns abound about the future impact that the outcome of the elections could have on the country's economic reforms and investments.

The results have created uncertainty. After prompting India's stock markets to post their biggest one-day drop in four years on Tuesday, the shares edged a bit higher in early trade on Wednesday. The BSE Sensex rose by 0.25 per cent to 72,250.38 and the NSE Nifty 50 index by 0.24 per cent to 21,969.55. The Indian rupee was largely flat at 83.45 against the US dollar.

The stocks rebounded a bit in afternoon trade with the BSE Sensex up more than 2 per cent at 73,717.91 and the NSE Nifty 50 also up more than 2 per cent at 22,416.20, at 1.22pm India time. Both indices closed higher on Wednesday, with Sensex up 3.20 per cent at 74,382.24, and Nifty 50 up 3.36 per cent at 22,620.35.

However, following the election outcome, Indian stocks could fall further in the coming months, according to some analysts.

“We believe Indian equities will go into a bear market and will fall by more than 20 per cent by April 2025,” says Amit Goel, co-founder and chief global strategist at asset management company Pace 360.

Other market experts are optimistic that the fall in stocks has largely been a knee-jerk reaction to the election outcome and that the situation will stabilise.

“We would like to believe that the development agenda that spurred the performance of equity is likely to persist, irrespective of the party in power,” says Vinit Sambre, head of equities at DSP Mutual Fund.

“Some of the reforms implemented are integral to the long-term growth and efficiency of the country and are unlikely to be undone easily. Consequently, once the initial shock subsides and market sentiment steadies, the markets are anticipated to regain stability.”

There is bit of “uncertainty” as investors are concerned about the slowdown of reforms that had been initiated under the BJP-led government, says Mr Sambre, adding that investors will “reassess the outlook under the new political landscape”.

The results indicate that Mr Modi is on course for his third term as Prime Minister. However, the BJP failed to secure an outright majority of 272 seats on its own and will depend on its coalition partners who are part of the National Democratic Alliance to form a government.

The BJP and its allies were ahead in 293 seats, according to the results on Wednesday morning.

However, the dependence on its allies could significantly weaken its role in decision-making and change the new government's economic priorities, some experts warn.

“Unlike in the last administration, when the BJP could steamroll through policies without the approval of its coalition partners, this time its partners will have a lot of say,” says Mark Matthews, head of Asia research at Julius Baer.

“They may be reluctant to agree to the big reforms that would have the most impact, specifically the ability of the government to acquire land, and the ability of companies to hire and fire employees.”

However, while the BJP’s power may be diluted, it is still intact, Mr Matthews adds.

“Momentum in the economy from the existing reforms is still strong and will not fade away,” he says.

Madhavi Arora, lead economist at Emkay Financial Services, says that “with the 2024 general election throwing up a negative shock, the power equation and possible political compulsions could lead to policy rethink by the NDA”.

“Reforms like those related to land, agriculture, and labour … will take a back seat,” she says.

“But we do not think there will be a material change in the broad macro backdrop.”

India is the world's fastest growing major economy, with gross domestic product growth of 8.2 per cent in the financial year ending March 31, according to official data.

“GDP growth in the January to March quarter, at 7.8 per cent year on year, confirms an economic upcycle that we believe has several more years to go,” says Mr Matthews. “It should translate into annual earnings growth in the low teens over the next few years.”

On June 28, India will be included in the JP Morgan Emerging Market bond index, with inclusion in two other bond indices set to follow, according to Julius Baer.

“The result is that tens of billions of dollars should flow into the Indian economy from overseas, over the next two years,” says Mr Matthews.

However, markets have been rattled by the election results. As it became clear on Tuesday that the BJP had not performed nearly as well as the exit polls suggested, stocks crashed, ending the day down 6 per cent.

There is a high chance of market volatility, some analysts warn.

“Due to the dependency on coalition partners, the coming [NDA] government may shift its focus towards a welfare-oriented approach rather than concentrating on reforms during the July interim budget,” says Puneet Sharma, chief executive and fund manager at Whitespace Alpha.

“[However], our long-term view remains bullish on India's story. And that the strong fundamentals of the Indian economy support the sustainability of long-term growth and valuations for Indian corporations.”

India's young demographic and rising incomes are factors that are expected to help drive consumer spending in the world's most populous nation, with more than 1.4 billion people.

What it means for UAE-India economic relations

Analysts are also starting to assess what the election result might mean for economic relations between India and the UAE, which have strengthened further under the Modi government. But with expectations that Mr Modi will form a government, Mr Goel remains confident that these relations will continue to flourish.

“It would not significantly impact the outcome on UAE-India investment relations,” says Mr Goel.

“With the signing of a comprehensive economic partnership agreement in 2022 and a local currency settlement system last year to encourage the use of Indian rupee and dirham for cross-border transactions, India and the UAE have strong and growing ties in recent years.”