India Elections Results
6 JUN, 2024
By Jose Luis Palmer from RankiaPro Europe
After seven weeks, the Indian elections have come to an end. The result has surprised the markets, which were expecting a Modi victory in which he would win an absolute majority. However, Modi is expected to be appointed Prime Minister in a coalition government and in need of the support of government partners. How will this affect India's economic and social policies? Will it continue to enjoy a positive scenario for growth and investment?
Find out the first-hand views of distinguished professionals in the asset management industry.
Pro-Growth & Pro-Investor agenda to continue
Ashish Chugh, Portfolio Manager at Loomis Sayles (Natixis IM)
The Indian elections have had a surprising outcome. Although exit polls had predicted a clear majority for Prime Minister Modi's BJP, the final results were much weaker: the BJP won 240 seats, far short of the 272 needed for a clear majority. Despite this setback, the BJP-led National Democratic Alliance coalition won a total of 292 seats. Modi will thus become prime minister again for a third consecutive term. For the past ten years, the BJP has ruled India with a clear majority. However, it will now have to work with coalition partners. This could lead to a slowdown in policy-making and potentially more populist policies. However, we believe that the BJP's pro-growth, pro-investor agenda will continue. India has many structural drivers of growth that will continue to operate regardless of the ruling party. Moreover, the last decade has seen significant investments in physical and digital infrastructure that will continue to drive productivity and economic growth. This election result does not change India's path to becoming the world's third largest economy in the coming years.
Uncertainty over India's election results led to sharp falls
Liam Patel, small-cap equity investment manager at abrdn
After exit polls pointed to a landslide victory for Modi, markets have suffered a sharp sell-off as it appears that Modi's Bharatiya Janata Party does not have a simple majority, erasing 2.5% gains after the release of those polls. The National Democratic Alliance coalition can still continue to form the new government, based on the seats it currently wins (around 300); however, Modi appears to have lost his majority, so he can remain PM, but his coalition partners are likely to oppose some of his planned initiatives, hence the markets‘ reaction.
Kenneth Akintewe, head of Asian sovereign debt at abrdn
A classic ‘buy the rumour, sell the fact’ outcome, and reinforces that politics is an extremely complicated beast. Food inflation has been high and the agricultural sector has struggled, while the government has also reduced subsidies, so the loss of support in the agriculture-oriented parts of the economy is not necessarily surprising.
Similarly, India has experienced a high level of growth, but not everyone has benefited, and consumption has not been as strong. The election result will be a wake-up call for the government and could serve as an important catalyst for it to refocus. However, these are not easy challenges to address. This reinforces the urgency of developing a thriving manufacturing sector to create many more high-paying jobs and continuing to push for reforms that will strengthen the economy and provide the resources the government needs for economic transition, for example through privatisation of public enterprises and monetisation of assets.
If the final result is achieved with a majority through a coalition, the government is not in an unfamiliar environment. The beginning of the BJP's time in power was characterised by coalition politics, but it was still able to push through key reforms, so India can be expected to make further progress. There is a risk of somewhat more populist policies, but fortunately, on the fiscal side, the starting point is a much stronger fiscal performance than expected and a structurally stronger fiscal position that provides important buffers, reinforced by higher transfers from India's central bank, the RBI to the government.
Indeed, as far as the bond outlook is concerned, the election outcome does little to derail it, as bond supply and demand dynamics remain very favourable and inflation and policy rates continue to trend downwards. Indeed, the knee-jerk response of higher yields and some currency weakness could be an attractive opportunity to add risk. However, it could complicate the continuation of some of the more difficult reforms, such as land, labour and some aspects of agricultural reform, but the ball will be in the government's court and, if we have learned anything from the BJP over the last decade, it is that it is not a government that wimps out in the face of adversity.
India moves from a single-party to a coalition government
Kunjal Gala, Head of Global Emerging Markets, Senior Portfolio Manager, Federated Hermes
The BJP has lost its absolute majority and needs the support of its allies, who are part of the National Democratic Alliance (NDA), to form the next government. This is in contrast to the last two legislatures (2014 and 2019 elections), when the BJP had its own majority in Parliament and, moreover, the support of its allies in the government. While it remains optimistic that the BJP will rule India (along with allies, of course), several questions remain:
- Decision-making: Prime Minister Modi is a powerful leader and the driver of most decisions. How will he function with allies who may now demand Cabinet space?
- Populism: In the coming months and two years, several states will elect their representatives. Will the BJP/NDA turn populist to swing the result in its favour?
- Reforms: The last two legislatures were remarkable in terms of passing structural reforms. This was possible partly because the BJP had an absolute majority. What is the future of pending reforms and will the government be able to pass them with the support of allies?
- The opposition: The big winners of the 2024 elections are the opposition parties, which were facing yet another defeat and possibly the end of the political careers of many of them.Will the opposition bloc feel strong enough to take on the BJP/NDA in the next state elections, with the hope of finally forming a government in the 2029 elections at the Centre?
- Investments: India needs significant investments in infrastructure, manufacturing and defence capabilities.Will the private sector and foreign investors spend as much knowing that the government's priorities or pace could change in a coalition environment?
In the short term, there is clear downside risk to Indian equities, as valuations of small and mid-caps are high, and overall positioning in India is likely to remain high (i.e. an over-owned market). As investors assess their allocations, some adjustments are inevitable. There is likely to be some uncertainty as the incoming government will be a coalition of parties and therefore there will be risk around government policies/priorities.
In the medium term, the outlook for equities will depend on the earnings trajectory. In part, this will depend on the recovery of the rural and agricultural sector, the government's investment plan and the revival of private sector fixed capital investment, which will drive job creation in the economy. Suppose the coalition policy results in reversals or concessions, or policy slippages that lead to fiscal problems. In that case, there is likely to be an increase in volatility affecting stock returns.
The shape of the next government, the choice of ministers, including the crucial finance minister, and the forthcoming budget/policy statement will be important in assessing the macroeconomic trajectory. Despite the elections, the country's potential remains intact. However, reforms are crucial to realise the potential and therefore, to this extent, investors' high expectations will have to be readjusted.
In the long term, reforms are crucial, and we are now somewhat sceptical that structural reforms in complex areas such as the agricultural sector and the Electricity Law will take place.
Generally, companies that benefit from structural growth factors (as opposed to government policy), with strong balance sheets and credible management, will generally perform well, provided they trade at reasonable valuations.
Despite disappointing result for Modi, India's growth will maintain momentum
Nick Payne, Chief Investment Officer, Global Emerging Markets Equity Strategy, Jupiter AM
The last 48 hours have been a rollercoaster ride for Indian stock markets. Although Modi and the Bharatiya Janata Party (BJP) are likely to remain in power - a fact that almost no one doubted - having a smaller majority will have implications for their reform agenda.
In a clear ‘buy on the rumour’ move, Indian markets rose ~4% on Monday after India's notoriously inaccurate exit polls indicated a landslide majority. The beneficiaries of ‘Modi-nomics’ - state-controlled banks, oil companies and the Adan group - led the charge, while higher quality companies and the IT services sector lagged. However, markets ‘sold off with the news’ on Tuesday as official results began to trickle in; the BJP's much-vaunted majority failed to materialise. The final tally of 290 seats won by the BJP's National Democratic Alliance (NDA) is lower than expected, but enough to allow the Modi-led coalition government to return to power. The results are clearly disappointing, but in the long term we believe the impact on India's prospects should be minimal.
Early indications suggest that this dramatic shift has been driven by poorer voters and inhabitants of regions that have been left out of India's growth; their experience of India's growth has been markedly less positive. The likely impact of this is that Modi's ambitious reform agenda will be scaled back: Hindu nationalist policies and deeper reforms in land and labour laws may fall off the agenda. The focus will shift back to more immediate policies that improve the situation of India's rural population: agricultural subsidies, food and increased consumption could be potential candidates. While long-term reform will continue, we believe it will now necessarily move at a slower pace.
Much of the most impactful reform in India has already taken place. Indeed, some of the changes enacted in the first term are now beginning to bear fruit, such as the Goods and Services Tax. While a coalition government may reduce the BJP's ambition - particularly with more sectarian reforms that historically have always been less popular - the continued stability of a BJP-led government will allow the country to continue to deliver on its already strong foundation. We believe the scale and success of historic reforms and the ability to maintain focus and direction for the future will continue to drive India's growth going forward. As evidence of this, lost in the noise of Friday's elections, India's GDP was revised upwards to +8.2% - an impressive increase helped by the successful implementation of reforms enacted in previous terms.
India has a long history of coalition governments. Apart from two previous BJP governments, India has not had an absolute majority since Rajiv Gandhi's government in 1984. India's politicians are adept at navigating coalition politics, a feat that will be significantly easier for the NDA's four-party coalition than for the 18-party coalition of the opposition INDIA alliance. There is always the possibility that the NDA will fail to form a government, but we believe this is highly unlikely.
While we expect to see continued volatility in the short term as the market digests these changes - the rotation into equities that have lagged the rally in Indian markets over the last 18 months could persist in the short term - in the longer term we believe the impact will be minimal. The last two terms of economic reform have set the nation up well to continue on its current growth trajectory. The continuation of the ruling party should also see the continuation of the government's reform agenda and capital spending, albeit with a shift towards greater immediate support for India's rural population. We invest in high quality companies with strong competitive positions and ample growth opportunities that can benefit from the immense opportunity that exists in India; a long-term opportunity that is no smaller today than it was yesterday.
Despite disappointing result for Modi, India's growth will maintain momentum
Amol Gogate, manager of the Carmignac Portfolio Emerging Discovery fund
After a seven-week election, Narendra Modi is likely to be sworn-in this weekend as India's prime minister for a record third time. Although in this term, he will be dependent on support from his coalition partners.
One of the reasons Modi has been such an effective leader is that his party had a simple majority. The market, or businesses, never had to worry about a coalition partner obstructing any particular reform or legislation. And his pro-businesses policies and fiscal orthodoxy have undoubtedly supported India’s strong recent performance.
Luckily for Modi, his two largest coalition partners (N Chandrababu Naidu and Nitish Kumar) are both reform-oriented politicians with a long track record of collaborating with the BJP. Both were part of the NDA coalition with Modi's mentor, Atal Behari Vajpayee (Prime Minister from 1999 to 2004). That coalition is remembered for economic and governance reforms that laid the foundations of India’s decades-long economic growth.
Nevertheless, managing a coalition could somewhat slow down the government’s pace of execution. To ensure he can continue with his ambitious economic agenda, Modi will need to channel his mentor Atal Behari Vajpayee who espoused 'coalition dharma'.
While the election results are certainly a dampener for the markets and sentiment in the short term, they also showcase that India is a true democracy. And with Modi at the helm, it seems likely the next phase of economic development will proceed and the long-term investment case for India, for now, remains solid.
Increased capital allocation from global investors is likely to be a catalyst for future growth. To date, investment in India’s stock market and bonds has been overwhelmingly domestic, but there are two events likely to shake this up: the inclusion of India in JP Morgan’s widely tracked emerging markets government bond index, starting June 2024; and the inclusion of eligible Indian bonds in Bloomberg’s emerging market local currency index, from September 2024.
According to our estimates, these two events could bring in up to US$40 billion in new foreign investment. As international investors become more familiar with the country, the ‘halo’ effect should transfer to equity markets.
This capital boost, combined with Modi’s pro-business stance and a well-managed domestic financial system means Indian markets are poised to continue their upward march. However, with valuations already high, and a less certain political landscape, volatility may increase, so selectivity is becoming more important. In our view, small- and mid-cap firms will benefit from a likely capex upcycle, as well as the financial services, high-end manufacturing and real estate sectors. The most disruptive businesses, with the highest potential for rapid growth will emerge on top thanks to a highly supportive ecosystem for budding companies.
