A Surprising Indian Election Result, But What Does it Mean for Investors?

Jun 2024
Country Focus

After a six-week period, India finally received its much-awaited election results on 4 June. Incumbent Narendra Modi and his party, the BJP, won 240 seats, failing to maintain the absolute majority they have enjoyed since 2014. However, the BJP’s wider alliance, the NDA, secured 292 seats, surpassing the 272-seat majority mark. As a result, Modi will remain the prime minister of the world’s largest democracy, leading a coalition government in which the BJP relies on smaller parties within the NDA.

Source: ECI Data compiled by CSDS

Over the past decade, the BJP’s pro-business agenda has proven to be highly popular among investors, making this week’s result a shock and disappointment for many who are worried about pro-business policy continuity. The party has implemented a wide spectrum of reforms aimed at prioritising economic growth, maintaining low inflation, ensuring fiscal prudence, boosting exports, attracting FDI and improving foreign relations. Here we list some of the party’s most significant reforms:

Make in India, 2014.
Promoting Manufacturing and Infrastructure

This multi-faceted initiative aimed to make India a manufacturing hub, particularly in electronics, whilst upskilling its labour force and attracting domestic and foreign investment into 25 key sectors, such as automotive and textiles. It included simplifying regulations and reducing red tape to improve the ease of doing business. Additionally, it placed a crucial emphasis on improving infrastructure through increased investments, as well as opening previously restricted infrastructure sectors to FDI, such as railways and construction.

Throughout its tenure, the BJP has intensified its efforts to develop electronics manufacturing along with semiconductor manufacturing, introducing further schemes such as the Production Linked Incentive scheme (2020) and the Semiconductor Mission (2022). These initiatives have attracted international businesses such as Apple, which aims to manufacture 1/4 iPhones in India by 2025, along with Taiwanese Powerchip Semiconductor Manufacturing Corp, Japanese Renasas, and Thai Stars Microelectronics, all of which are supporting the construction of India’s first three semiconductor fabrication facilities this year.

These initiatives reflect the agenda of the BJP in government over the past decade in which they have significantly increased capital expenditure across various sectors, not limited to manufacturing alone. This government has helped to drive investment, stimulate job creation, bolster consumer demand, and place India as a robust and stable alternative for countries looking to diversify their supply chains.

Source: Reuters, Indian Budget documents/speeches

Goods and Services Tax, 2017.
Reforming Tax

Another key reform is the Goods and Services Tax (GST) which consolidated the numerous cumbersome indirect taxes at both Central and State levels into one simplified and unified national tax framework. This overhaul not only streamlined tax processes but also accelerated the transport of goods and enhanced logistics efficiency by eliminating state barriers and reducing compliance burdens, measures particularly important in a country as large as India.

Furthermore, the GST has increased tax collections by broadening the tax base, integrating more businesses into the formal sector, and increasing tax compliance and administration efficiency. Since its inception, GST collections have consistently followed an upward trajectory, increasing from an initial Rs 92,283 crore in July 2017 to its highest yet of Rs2.1 lakh crore in April 20241. This has ensured fiscal prudence alongside the government's increased capital expenditure on reforms such as Make in India. The government’s fiscal prudence is evidenced by the FY2023-24 fiscal deficit of 5.6% betting the forecast of 5.8%, according to recent data released by the CGA. Moreover, it is projected to further reduce to 5.1% this financial year2.

Source: PIB, WorldBank, Make in India

Digital India, 2015.
Digitalising the Economy

Central to Modi’s vision of turning India into an economic powerhouse is the drive towards digitalisation. Underpinning this ambition is the Digital India initiative, which encompasses a multitude of digitalisation projects, with a focus on three key objectives: enhancing digital infrastructure, boosting digital literacy, and broadening the accessibility of government services through online platforms.

The reforms have had a transformative impact on the economy, successfully connecting millions of Indians to the Internet. As a result, more people and businesses have transitioned into the formal sector by accessing financial systems, e-commerce platforms, credit and e-government services, with much of this facilitated by the rapid and widespread adoption of Unified Payments Interface (UPI). The result has been increased financial inclusion, growth in start-ups and entrepreneurship, and increased efficiency and productivity.  

Source: Statista, RBI annual report 2022-23, DataReportal

Technology Incubation and Development of Entrepreneurs (TIDE 2.0), 2019.
Encouraging Innovation

The Ministry of Electronics and Information Technology under the government launched TIDE 2.0, an upgrade of the original TIDE project launched in 2008. This initiative supports startups involved in emerging technologies like IoT, AI, and blockchain through technical and financial assistance. TIDE 2.0 reflects the government's commitment to positioning India as a global hub for science and technology and fostering a favourable business ecosystem for innovative startups.

Source: World Intellectual Property Organisation

How will the election result impact the Indian market moving forward?

Modi will inevitably face greater challenges in passing certain business reforms this term. Unlike his previous two terms, he now must juggle the demands of allies with differing policy priorities to maintain a stable coalition, which may stymie the progress of certain business reforms. Vulnerable pipeline reforms include his land and capital reforms, the Uniform Civil Code, and the One Nation One Election initiative. On top of this, India may witness an increase in populist measures, such as unemployment reforms and higher rural spending.

However, a coalition government does not spell the end for pro-business reforms. Many of Modi's core allies have a strong pro-business track record in their respective provinces. For example, Chandrababu Naidu of the TDP, who served as Chief Minister of Andhra Pradesh (1995-2004, 2014-2019), prioritised making the state an FDI and technology hub during his tenures. Progress is expected to continue in key areas such as manufacturing, regulatory improvements, labour law implementation, job creation, and workforce upskilling. Furthermore, the business reforms of the past decade will continue to drive India's impressive economic growth, with an 8.2% GDP growth in FY2023-24, making it the fastest-growing major economy. The Reserve Bank of India recently raised the FY2024-25 real GDP growth forecast from 7.0% to 7.2%, highlighting the country’s ongoing growth prospects. Further still, the result does not undermine macro tailwinds such as India’s demographics, including a growing talent pool and consumer market, as well as its favourable position as the world looks to diversify supple chains.

Source: MOSPI

The Nifty 50 saw a sharp 6% drop on the day of the result3, the steepest decline in two years. Stocks in sectors such as PSUs and realty, which have benefited from the general market optimism and were trading at high valuations despite average fundamentals, were most affected by the volatility, which was largely a correction from the previous day's rally and a short-term sell-off on unfulfilled expectations. By 7 June, the Nifty 50 had already recovered all of its election day losses and we expect the Nifty 50 and Sensex 50 to continue their strong performance so far this year, up 7% and 8% respectively4 (as of 7 June 2024).  

This week's election result has not affected our bullish view on India. Our conviction in India's long-term growth story has further strengthened over the past year, leading MCP to add three new high-conviction Indian ideas to the portfolio. A two-month trip by an MCP analyst to meet with companies and experts on the ground reinforced our bullish view. We believe India's journey to become one of the world's great economic powerhouses will not be undone by a single election result.  

1 Press Information Bureau
2 Press Information Bureau
3 Capital IQ
4 Capital IQ 

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