India has become a popular country among investors but its economy may face new uncertainties after the country’s latest election result.
Prime Minister Narendra Modi’s Bhartiya Janta Party (BJP) failed to secure a majority after a general election in India but has managed to form a coalition government with a smaller margin, which may make it harder to implement policies.
It comes as India-focused funds have ranked among the most popular on investment platforms in recent weeks.
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Investors have been attracted to India's economic reforms and youthful demographics in contrast to other emerging economies.
Who won India's general election?
Analysts had expected Modi to improve his majority at the election.
But in a sign that there is only one poll that matters – the official one – the BJP only secured 239 seats, down from 303 and falling short of the 272 needed for a majority.
The National Democratic Alliance (NDA), the political coalition led by Modi’s BJP, still managed to secure 291 seats.
It has formed a coalition with support from pre-alliance partners in the states of Andhra Pradesh and Bihar, helping the NDA lead the government, albeit with a smaller margin.
The opposition Indian National Developmental Inclusive Alliance (INDIA) made unexpected gains, securing 234 seats, while the Indian National Congress (INC) almost doubled its seat count to 100.
“The BJP’s allies will now have greater bargaining power, which could extend to cabinet decisions and crucial reforms,” says Anuja Munde, Asian equity senior portfolio manager at Nikko Asset Management.
“This means the BJP will need to include its allies in important decision-making processes.
“Prime Minister Modi’s government may now have a reduced majority but Indians have voted for his government for a third term, signalling a desire for policy continuity and continued reform momentum.”
What does India's election result mean for investors?
Economic reforms have helped India become the world's fifth-largest economy, with a GDP of around $4 trillion – close to overhauling Japan and Germany.
India’s benchmark stock index, the NIFTY 50 is up 7% so far this year and by 25% annually.
This is reflected among investors.
Trading volumes into India-centric funds, investment trusts and exchange traded funds available on interactive investor have risen 26-fold over the past two years to 30 April 2024, and up 21-fold over the past year alone, the platform says.
“India has cemented its status as one of the largest and fastest growing economies in the world, bolstered by a suite of business-friendly reforms enacted by President Narendra Modi from an investment standpoint,” says Alex Watts, fund analyst at interactive investor,
India also has a younger population than other emerging markets such as China, making it a key growth area among investors.
While the post-result analysis suggests that voters are unhappy with issues such as unemployment and inflation, Munde suggests the fundamentals remain the same.
“India’s growth story remains resilient, but there seems to be a disparity between household consumption growth and real GDP growth,” she adds.
“In the post-pandemic period, India has been witnessing a K-shaped consumption recovery, with demand from the affluent or premium segment doing well and with demand for entry-level and mass-market goods remaining subdued.
“The lower end of the income pyramid has struggled following the pandemic and limited fiscal support has amplified the situation.”
Munde suggests the government will have to focus more on job creation and expanding the manufacturing sector while maintaining its focus on infrastructure development and digitalisation.
That may concern some investors about the future direction of the economy but she highlights that reforms in India have generally survived political challenges.
“We expect the government to maintain the pace of governance and administrative reforms,” Munde says.
“However, the more complex reforms involving land and labour need greater consensus building.
“Therefore, while near-term uncertainty is high and the political backdrop is slightly different, the broad direction of reforms and macroeconomic factors remains unchanged."
Similarly, Thomas Mathews, senior markets economist for Capital Economics, says India’s election result isn’t reason to turn downbeat on the country’s equity market, highlighting that political risk in the country is low compared with other emerging markets.
“But with a very positive story seemingly still priced in to India’s equities, both on the political and economic fronts, it does seem as though they are unlikely to outperform further in the near term,” he adds.
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