While the results of the 2024 Lok Sabha Elections caught the markets off guard with BJP’s seat tally falling short of expectations, in terms of the state of the economy, experts believe that the the policy agenda (investment-led growth, capex,iInfrastructure creation, manufacturing, etc.) may continue, although with some tweaks.
Per the final tally, the BJP-led NDA (National Democratic Alliance) has 291 seats, of which the BJP alone has 240 seats.The BJP not getting a simple majority on its own means that the alliance partners will have higher negotiating power. The BJP-led NDA alliance is a pre-poll alliance, and hence there will be less friction in the government formation exercise. However, the coalition government is making a comeback after two consecutive terms of clear single-party majority. This means, unlike the earlier NDA coalition governments of 1998-2004 which had >15 constituents with the BJP itself at 182 seats, this coalition will have a lesser number of constituents with the anchor BJP at ~240 seats.
Current policy agenda to continue
Analysts at Motilal Oswal said that despite the reduced majority, the policy agenda of the new government is expected to continue, although with some tweaks. “We expect the government to steer clear from the contentious issues such as Uniform Civil Code, One Nation One Poll, Farm Laws, etc. Prime Minister Modi in his victory speech, however, reaffirmed his commitments to reforms and growth. While the broad thrust on capex and investment-led growth continues, the agenda going forward could also include measures for reviving consumption at the bottom-of-the-pyramid, some relief in taxation measures, and indeed the rationalization in the GST structure,” said analysts and experts at Motilal Oswal.
Achala Jethmalani, Economist, RBL Bank, also said, “With the NDA alliance partnering for a third term, we see policy continuity in the milieu of India’s robust macroeconomic fundamentals. Besides, a narrow margin victory for the BJP on its own could lead to faster required reforms which will further support India’s growth story. The banking and financial sector, at large, is expected to grow and contribute only positively to the growth story as we expect policy continuity under the BJP-led alliance for the third time, even with a weaker individual party victory.”
Shift towards populist measures, without deviating from core policies
Furthermore, economists and experts opined that there will be a growth in focus towards some populist measures to address rural stress and lift sentiments at the margin, given the nature of the verdict. Rupen Rajguru, Head Equity Investments and Strategy, Julius Baer India, said, “While the focus on the existing reforms related to domestic manufacturing, infrastructure development, etc. is likely to continue, there could be an incremental shift of focus to support domestic consumption, especially rural consumption, which has continued to lag quite a bit over the past couple of years and has probably emerged as a sore point for the voting community.”
The new NDA government, per analysts at Elara Securities, will not take the underwhelming victory as a reason to turn populist and start doling out freebies at large. “It may not be possible for the BJP to deviate from its core thought process of capex-led nation-building, control on inflation and a strong currency. Hence, there is no reason to be Overweight consumption, just based on the outcome of the polls. However, some rural focus, which was already part of BJP’s manifesto, could benefit rural consumption in the third NDA term. It is worth noting that in the speech made by PM Narendra Modi, he sounded confident as regards sticking to the NDA agenda,” stated a report by Elara Securities. Notably, the government does have some leeway with the higher-than-expected RBI dividend and recent moderation in Brent crude prices.
This suggests that there will be no significant slowdown in the ongoing nation-building programs which affirms that there will be no risk to the levels of infrastructure capex/ defence capex. The possible outcome of this will be a slight delay in political reforms such as Uniform Civil Code, and land /labour reforms or PSU privatization, but the entire process will not be derailed.
Analysts at Motilal Oswal said, “We see the broader fiscal discipline to be still maintained and long-term priorities, viz., thrust on renewable energy, investments in power, PLI, etc., to continue. In the very near term, we expect the market to remain obsessed with government formation exercises, with a keen eye on key cabinet portfolios such as Finance, Defense, Roads, Energy, Commerce, and Railways. With elections now behind, fundamentally, India remains in a very good shape with almost a mini-Goldilocks moment with excellent macros (GDP growth of 8.2% in FY24 on the back of ~7% growth in FY23, inflation at ~5%, both current account and fiscal deficits well within tolerance band, stable currency, etc.), solid corporate earnings and valuations at ~20x one-year forward earnings.”
On similar lines, Tanvee Gupta Jain, Chief Economist at UBS India, said, “We continue to expect a government push towards supply-side reforms including manufacturing, simplification of regulatory processes, labour law implementation, skill development and creating employment opportunities (especially blue-collar jobs in low-skilled labour-intensive manufacturing) amongst others. However, we think implementation of tougher reforms including land reforms, a big boost to infrastructure spending, divestment, farm bills, Uniform Civil Code, One Nation One Elections, amongst others will be challenging. In our view, these will matter a lot for the overall narrative for investor sentiment.”
According to Kotak Institutional Equities as well, the new government will continue with its investment-led economic agenda, but definitely with some tweaks in its priorities to support consumption and employment. “We will get a better sense of the same over the next few weeks and in the FY2025 final budget. The government may continue with its focus on (1) affordable healthcare and housing, (2) energy transition, (3) infrastructure development and (4) manufacturing. The government has already executed the bulk of the required reforms for incentivizing private investments and execution will be more material,” it said.
From a market strategy perspective, experts continue to prefer Large caps over SMIDs due to valuation comfort. The consumer space is expected to benefit from the policy shift towards welfare measures and also due to the revival in rural consumption due to the normal monsoon. A JM Financial report stated, “On a sectoral level we prefer the Consumer space as it will benefit from improving consumption demand due to the normal monsoon; moreover, any populist measures tend to benefit the Consumer space the most. We expect the government to continue to focus on infrastructure development but some allocation could be made towards welfare schemes. The fiscal deficit target for FY25 is likely to be kept unchanged at 5.1 per cent of GDP.”