After years of certainty, India’s political and economic trajectory has suddenly become more complicated. While polls ahead of the world’s largest elections forecast a resounding victory for Prime Minister Narendra Modi and the ruling Bharatiya Janata Party, the vote saw him lose his parliamentary majority, forcing him to turn to his political allies to form a government.
The BJP won 240 seats in the 543 seat Lok Sabha lower house. While remaining the largest party by seats overall, it is the first time the party has not had a majority since 2014. Modi has outlined plans to establish a coalition with smaller parties comprising his National Democratic Alliance, which would contribute a further 53 seats.
The Modi government now faces challenges on how it will push forward its agenda with a weakened political mandate. With coalition talks under way at time of writing, analysts are querying whether this new political phase represents the end of “Modinomics” and the staggering growth seen in the Indian economy during his past decade in office.
Market seesaw
News of the BJP’s underperformance on Tuesday took the market by surprise, with stocks posting losses of $386bn, sending the BSE Sensex index 5.7 per cent lower, the biggest one-day decline in four years. Stocks quickly erased losses towards the end of the week, however, with the Sensex trading at close to an all-time high on Friday afternoon.
The markets had been positioned for a resounding Modi victory, says Siddarth Bhamre, head of research at Asit C Mehta Investment Intermediates, and there may be some negative market outcomes from the results. “Though it’s NDA which in all likelihood will form the next government, the market may see some more correction. With the best case scenario factored in, valuations are not very attractive. Also, fund flow may see some dip due to uncertainty,” Bhamre adds.
In a diverse country like India, a coalition can also mean good news for growth and markets
Opposition leader Rahul Gandhi on Friday accused Modi of stock market manipulation, claiming that the prime minister and other BJP leaders had urged people to buy stocks ahead of the election results.
Pratik Dattani, founder of UK-based think-tank Bridge India, says the markets prefer stability, and will remember the policy paralysis of the last coalition government, with the United Progressive Alliance in power from 2004 to 2014. However, there were periods of strong economic growth under the UPA coalition. “The previous UPA government and early years of the second UPA government actually boasted higher, and more inclusive, growth than the BJP has managed in the last decade. In a diverse country like India, a coalition can also mean good news for growth and markets,” he adds.
Ruth Kattumuri, co-chair of the India Observatory at the London School of Economics, says there is comfort in the parties being headed by stalwart politicians: “The markets will see that and will no doubt stabilise as soon as they realise that the coalition government is formed,” she adds.
Banking boom to continue
In the days leading up to the election results, Modi heralded the success of India’s banking sector, which saw its net profits surpass Rs3tn ($35.9bn) for the first time in the financial year ending April 2024. Writing on X, Modi stated the health of the banks would improve access to credit for the poor, farmers, and for micro, small and medium-sized companies.
Finance Minister Nirmala Sitharaman said the government reforms and improved governance through the Enforcement Directorate has seen banks recover more than Rs10tn in bad loans between 2014 and 2023.
Dattani has a positive outlook for the Indian banking sector overall: “The currency will remain stable and the debt market is likely to remain attractive. The Indian stock market and real GDP growth have typically tracked each other closely — which is different from other counterparts part of the Brics, the emerging economies group — so expect GDP to grow steadily and likewise for the markets too. After spending a decade cleaning up balance sheets, and consumer sentiment finally at pre-Covid levels, we are now in a position where banks want to lend and businesses want to borrow.”
Gaurav Narain, manager of the India Capital Growth Fund, agrees there will be little impact on the banking industry overall, but notes the government may need to shift some aspects of its policy.
“The government may spend more on welfare schemes to prop up distress in rural India. This may have an impact on the government fiscal discipline and the deficit may exceed the target of 5.1 per cent. This could have an impact on yields,” he adds.
Asset quality will remain high, according to Narain, who says the proactive stance of the RBI in increasing risk weighting and provisioning if they are concerned about excess lending in certain market segments will mean there are no issues around a rise in non-performing assets.
GDP and growth
India was the fastest growing economy in 2023, with the economy expanding by 8.2 per cent in the fiscal year ending April 2024. Goldman Sachs forecast a 6.7 per cent GDP increase for 2024, and the IMF predicted 6.8 per cent, citing strong domestic demand and a growing working age population.
At the end of May, S&P Global Ratings revised its outlook on India from stable to positive. The ratings agency also affirmed the BBB- long-term and A-3 short-term unsolicited foreign and local currency sovereign credit ratings. The country’s robust economic expansion and sound economic fundamentals were cited as underpinning the country’s growth momentum in the coming years.
Dattani believes the greatest risk to growth is foreign investors being spooked by the coalition politics, and the pro-growth reform agenda stalling in parliament. “Modi isn’t known for reaching across the aisle when introducing new policies, so the next few months will be a test of whether the BJP is able to work with others in the pursuit of inclusive development,” he adds.
In a note, Alicia García Herrero, chief economist for Asia-Pacific at Natixis, says an issue is the creation of jobs, specifically in manufacturing. She notes that India’s economic growth has been largely driven by domestic demand, while its share of exports has stagnated.
However, Bhamre says it is corporate India that has been driving growth, and that will continue irrespective of the government that is formed.
