Foreign brokerages say BJP’s lower-than-expected victory to delay tough reforms but expect policy continuity

Foreign brokerages anticipate changes in economic policy dynamics, with tougher reforms being delayed due to Prime Minister Narendra Modi’s smaller-than-expected poll victory. However, they believe policy continuity on investment-led growth, Capex, infrastructure creation and manufacturing will be maintained under the Bharatiya Janata Party-led coalition government.

In the Modi’s third term, they also see a risk of populist bias targeted at lower income strata and measures to revive consumption at the bottom of the pyramid. 

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Given the new political reality, the Modi-led coalition, which is way short of the 350-seat mark that most exit polls predicted for the NDA, may dilute its supply-side policy-making style so as to enhance its support for consumption and employment and therefore increase spending on direct social schemes, several brokerages said. 

“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”, Tanvee Gupta Jain, Economist, UBS said in a research note. 

Switzerland-headquartered UBS highlighted that the political outcome in the General Elections 2024 was close to the feedback it had received from global investors which were expecting a BJP-led coalition as their base case, contrary to local investors expectations of a BJP single-party majority. 

“While political stability should help ensure continuity in policy agenda, we see risk of populist bias in third term (targeted towards lower income strata)”, UBS note issued on Tuesday said. 

Jain said that the base case is for the government to stick to a medium-term fiscal consolidation roadmap but with a populist bias. The higher-than-expected dividend transfer to the government would create fiscal leeway to increase populist spending to support consumption for lower-income strata while continuing its thrust to boost public capex, she added. 

India is seeing a K-shaped consumption recovery with affluent/premium segment demand seemingly doing well, and demand for entry-level and mass market goods has remained muted post the pandemic, according to UBS. 

Meanwhile, Morgan Stanley India Equity Strategist Ridham Desai said in a note that pace/direction of reforms are unlikely to slow or change. Most of the likely reforms in the coming five years are in the arena of execution rather than law changes. 

Desai also said that Morgan Stanley Research’s base case is that the BJP-led NDA government is unlikely to sacrifice macro stability as its anchor to economic policy. 

CLSA in a research note highlighted that the BJP has underperformed the most in the three biggest states viz. Uttar Pradesh, Maharashtra and West Bengal. All these states have a predominance of rural and agri workers. In addition, state elections in Maharashtra are scheduled in less than six months. This makes us wonder if the new BJP government will take this voter feedback and dilute its unequivocal supply side policy-making style to also accommodate the rural and agri push to address this political reality”, said CLSA Research Analyst Vikash Kumar Jain in the research note titled ‘From Conviction to Doubt’. 

CLSA note said that Indian equity markets led by Modi stocks had approached the national elections with a lot of conviction in the continuity of a strong BJP government. 

The election verdict of the BJP lacking a simple majority questions this conviction and raises doubts over a stable government and policy-making styles, it added. These doubts openly question the notable premium of Indian equities versus history, compared to bonds, the near record premium of Small and Midcaps (SMIDs) and the recent re-rating of Modi stocks, CLSA said. 

Meanwhile, Julius Baer, India’s largest foreign wealth manager, said the new government at the Centre is expected to incrementally shift focus toward supporting domestic, particularly rural, consumption, which has lagged in recent years and emerged as a concern for voters.

Additionally, with the likelihood of coalition government and possible shifts in equations in the political alliances, the government will be on some sort of a backfoot in terms of bold policy measures around land, labour, judicial reforms and uniform civil code etc, Rupen Rajguru, Head Equity Investments and Strategy, Julius Baer India, said in an India Equity Strategy note post the general election result announcements.