After years of stability, India’s political and economic trajectory has suddenly become more complex. Polls ahead of the world’s biggest elections had predicted a landslide victory for Prime Minister Narendra Modi and the ruling Bharatiya Janata Party, but he lost his parliamentary majority in the polls and was forced to turn to his political allies to form a government.
The BJP won 240 seats in the 543-seat Lok Sabha. Despite being the largest party overall, it was the first time since 2014 that the party did not get a majority. Modi outlined plans to forge alliances with smaller parties that include his National Democratic Alliance, which would give it 53 more seats.
The Modi government now faces challenges on how to advance its agenda with a weak political mandate. With coalition talks ongoing at the time of writing, analysts are questioning whether this new political phase represents the end of „modenomics” and the stunning growth seen in the Indian economy during his tenure in the last decade.
Market cheese
News of the BJP’s underperformance surprised the market on Tuesday, with shares posting a $386bn loss, sending the BSE Sensex index down 5.7 per cent, its biggest one-day decline in four years. As the Sensex traded at an all-time high on Friday afternoon, stocks quickly erased losses over the weekend.
Siddharth Bamre, head of research at Acid C Mehta Investment Intermediates, said markets are positioned for Modi’s victory and there could be some negative market effects from the results. “Although NDA will form the next government, the market may still see some corrections. Factoring in the best-case scenario, the valuations are not very attractive. Also, we may see some decline in fund flow due to uncertainty,” adds Bamre.
In a country as diverse as India, an alliance can mean good news for growth and markets
Opposition leader Rahul Gandhi on Friday accused Modi of stock market manipulation, saying the prime minister and other BJP leaders had forced people to buy stocks ahead of election results.
Prateek Dattani, founder of UK-based think tank Bridge India, said markets crave stability and will remember the policy freeze of the previous coalition government that ruled the United Progressive Alliance from 2004 to 2014. Strong economic growth under the UPA coalition. „The previous UPA government and the early years of the second UPA government actually achieved higher, more inclusive growth than what the BJP managed in the last decade. In a country as diverse as India, an alliance can mean good news for growth and markets,” he added.
Ruth Katumuri, co-head of the India Lab at the London School of Economics, says: “There is comfort in parties being led by determined politicians: “There is no doubt that markets will see that and stabilize once they realize that it is a coalition government. is evolving,” he adds.
Bank growth will continue
In the days leading up to the election results, Modi heralded a victory for India’s banking sector, which for the first time saw its net profit surpass Rs3tn ($35.9bn) in the fiscal year ending April 2024. Writing in X, Modi said the health of banks will improve Credit available to the poor, farmers and micro, small and medium enterprises.
Union Finance Minister Nirmala Sitharaman said that government reforms and improved governance through the Enforcement Directorate have seen banks recover more than Rs 10 trillion in bad loans between 2014 and 2023.
Dattani has an overall positive outlook for the Indian banking sector: “Currency remains stable and credit market attractive. Indian stock market and real GDP growth have generally tracked each other closely – unlike other stocks in the emerging economic group Brics – so GDP can be expected to grow steadily. After spending a decade cleaning up balance sheets and consumer sentiment to finally pre-Covid levels, we are now in a position where banks want to lend and businesses want to borrow.
Gaurav Narine, manager of Capital Growth Fund of India, agrees that there will be little impact on the banking sector as a whole, but notes that the government may need to change some aspects of its policy.
“Government can spend more on welfare schemes to address the woes of rural India. This could impact the government’s fiscal discipline and the deficit target of 5.1 percent. This may affect the yield,” he said.
While there is concern over overleveraging in some market segments, the RBI’s proactive stance on increasing risk weighting and provisioning has no problem with rising non-performing assets, says Naren.
Gross domestic product and growth
India will be the fastest growing economy in 2023 with the economy expanding at 8.2 percent in the fiscal year ending April 2024. Goldman Sachs forecasts GDP growth of 6.7 percent in 2024, driven by strong domestic demand and the IMF predicts 6.8 percent. A growing working age population.
In late May, S&P Global Ratings changed its outlook on India from stable to positive. The rating agency also affirmed BBB- long-term and A-3 short-term unclaimed foreign and local currency sovereign credit ratings. The country’s strong economic expansion and solid economic fundamentals lay the foundation for the country’s growth momentum in the coming years.
Dattani believes the biggest risk to growth is foreign investors being scared off by coalition politics and the stalling of the pro-growth reform agenda in Parliament. „Modi is not known to cross the aisle when introducing new policies, so the next few months will be a test of whether the BJP can work with others to work towards inclusive growth,” he added.
In a note, Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis, says one issue is job creation, particularly in the manufacturing sector. He notes that India’s economic growth has been largely driven by domestic demand, while its share of exports has stagnated.
Bamre, however, says that corporate India is driving growth and will continue to do so no matter what government is formed.
„Oddany rozwiązywacz problemów. Przyjazny hipsterom praktykant bekonu. Miłośnik kawy. Nieuleczalny introwertyk. Student.