With Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP) not securing the anticipated landslide victory, concerns are rising about how the election outcome will affect India’s economic reforms and future investments.
Market Reactions and Investor Concerns
The uncertainty created by the election results has already affected India’s stock markets, which experienced their biggest one-day drop in four years on Tuesday. The BSE Sensex rose slightly by 0.25 percent to 72,250.38, and the NSE Nifty 50 index increased by 0.24 percent to 21,969.55 in early trade on Wednesday. However, the stocks rebounded in the afternoon, with Sensex up more than 2 percent at 73,717.91 and Nifty 50 also up more than 2 percent at 22,416.20 by 1:22 PM India time. Both indices closed higher on Wednesday, with Sensex up 3.20 percent at 74,382.24, and Nifty 50 up 3.36 percent at 22,620.35.
Despite this recovery, analysts warn that Indian stocks could fall further in the coming months. “We believe Indian equities will go into a bear market and will fall by more than 20 percent by April 2025,” says Amit Goel, co-founder and chief global strategist at Pace 360.
Economic Outlook and Reforms
Other market experts remain optimistic, viewing the recent drop as a knee-jerk reaction. “We believe the development agenda that spurred the performance of equity is likely to persist, irrespective of the party in power,” says Vinit Sambre, head of equities at DSP Mutual Fund. He notes that many reforms integral to long-term growth and efficiency are unlikely to be reversed easily.
Investors are concerned about the potential slowdown of reforms initiated under the BJP-led government. Sambre adds that investors will need to reassess the economic outlook under the new political landscape.
Political Implications
Modi is on course for his third term as Prime Minister, but the BJP’s failure to secure an outright majority of 272 seats means it will depend on coalition partners within the National Democratic Alliance (NDA) to form a government. The NDA coalition is ahead in 293 seats, according to Wednesday morning’s results.
Reliance on coalition partners could weaken the BJP’s decision-making power and alter the government’s economic priorities. “Unlike in the last administration, when the BJP could steamroll policies without coalition approval, this time its partners will have significant influence,” says Mark Matthews, head of Asia research at Julius Baer. He notes that partners may be reluctant to agree to impactful reforms, particularly in land acquisition and labor policies.
Long-term Prospects
Despite these challenges, the BJP’s existing momentum in the economy remains strong. “Momentum in the economy from existing reforms is still robust and will not fade away,” Matthews asserts. He also highlights the projected GDP growth, which stood at 8.2 percent for the financial year ending March 31, 2024, indicating an ongoing economic upcycle.