Outlook of the Indian equity market post elections 2024 (Part I)

This article is authored by Sonam Srivastava, Founder and CEO of Wright Research.

The 2024 elections have ushered in a new era for India, with the BJP-led NDA coalition forming the government for a third consecutive term. As the dust settles on a tumultuous election season, investors are keenly assessing the potential impact on Indian equities over the next five years. This period is poised to be transformative, with significant implications for market confidence and investment strategies.

The BJP's coalition government, though lacking a clear majority, brings a mix of continuity and change. The anticipated increase in welfare spending, particularly focused on rural areas, signals a shift towards addressing voter concerns about rural distress. This move is expected to stimulate demand in various sectors, from consumer goods to agriculture-related industries.

However, the coalition dynamics also suggest potential challenges in policy implementation, especially in areas requiring state cooperation, such as power and GST reforms. These complexities could influence the regulatory environment and affect investor sentiment.

Another critical aspect is the government's ongoing emphasis on expanding manufacturing and improving employment rates. Initiatives like the Production Linked Incentive (PLI) scheme are likely to receive continued support, potentially boosting sectors like electronics and pharmaceuticals.

In this blog, we explore how these political developments will shape the trajectory of Indian equities. From sectoral impacts to broader economic trends, we analyze the factors that will drive market confidence and offer insights into navigating this evolving landscape.
Overview of the Election Outcomes

The 2024 elections have been a defining moment in India's democratic journey, marked by intense political campaigns, high voter turnout, and significant changes in the political landscape. The Bharatiya Janata Party (BJP), led by Prime Minister Narendra Modi, once again emerged as a key player, but this time with a nuanced victory. While the BJP did not secure an outright majority, it successfully formed the government through a coalition with the National Democratic Alliance (NDA), securing approximately 292 seats in the Lok Sabha.

This coalition victory highlights the diverse and fragmented nature of Indian politics, where regional parties have gained substantial influence. The BJP's performance saw a decline in the number of seats compared to the 2019 elections, losing around 63 seats. This loss can be attributed to various factors, including rural distress, economic challenges, and a strong opposition campaign.

Initial Reactions from Market Participants

The election results had an immediate impact on market sentiment. Initially, the markets exhibited volatility as investors processed the implications of a coalition government. The absence of a clear majority raised concerns about potential policy gridlock and slower decision-making processes. However, the fact that the BJP-led NDA could form the government provided a sense of continuity and stability, which gradually calmed investor nerves.

Key sectors such as banking, infrastructure, and consumer goods reacted positively, anticipating continued reforms and policy support. On the other hand, sectors dependent on swift legislative action, like power and GST reforms, faced uncertainty. The market's reaction underscored the importance of stable governance and effective policy implementation in maintaining investor confidence.

Historical Context and Comparison with Previous Elections

To understand the significance of the 2024 election outcomes, it is essential to compare them with previous election cycles. In the 2014 and 2019 elections, the BJP achieved decisive victories, securing clear majorities that allowed for bold policy initiatives and reforms. These victories were characterized by strong mandates that enabled the government to implement significant economic and structural changes, including the introduction of the Goods and Services Tax (GST) and various infrastructure projects.

In contrast, the 2024 elections reflect a more fragmented mandate, with the BJP needing to rely on coalition partners to form the government. This scenario is reminiscent of the early 2000s when coalition politics was the norm, and governments had to navigate through complex alliances to implement policies. The current political landscape suggests that while the BJP remains a dominant force, regional parties have strengthened their positions, necessitating a more collaborative approach to governance.

Impact of Coalition Dynamics on Policy Implementation

Challenges and Opportunities of a Coalition Government

The 2024 election results have resulted in a coalition government led by the BJP and supported by the National Democratic Alliance (NDA). Coalition governments, by their very nature, bring both challenges and opportunities.

Challenges:

1. Consensus Building: One of the primary challenges is the need to build consensus among coalition partners, each with their own regional interests and political agendas. This can slow down the decision-making process and lead to compromises that dilute policy effectiveness.
2. Policy Continuity: Maintaining policy continuity can be difficult when coalition partners have differing views on key issues. This can create uncertainty and instability, which might deter investment and hinder economic progress.
3. Political Stability: The stability of the government itself can be a concern. Coalition governments are often susceptible to internal conflicts and the risk of partners withdrawing support, which can lead to political instability and frequent leadership changes.
4. Implementation Delays: Large-scale reforms and infrastructural projects might face delays due to prolonged negotiations and the need to appease multiple stakeholders.

Opportunities:

1. Inclusive Governance: A coalition government can promote more inclusive governance by representing a broader spectrum of regional and local interests. This can lead to policies that are more attuned to the needs of diverse communities across the country.
2. Collaborative Policy Making: The necessity to collaborate can foster innovative and well-rounded policy solutions. When multiple viewpoints are considered, the resulting policies may be more comprehensive and sustainable.
3. Regional Development: Coalition partners often bring a strong focus on regional development. This can lead to targeted initiatives that address specific local needs, potentially reducing regional disparities and promoting balanced economic growth.

Potential Policy Frictions and Areas of Cooperation

Policy Frictions:

1. Economic Reforms: Economic reforms such as the Goods and Services Tax (GST) and labour laws may face resistance from coalition partners who are wary of their impact on regional economies. Balancing national interests with regional concerns will be a delicate task.
2. Agricultural Policies: Different states have varying agricultural priorities, which can lead to conflicts over policies related to subsidies, pricing, and rural development. Coalition partners from agrarian states may push for more favourable terms, creating friction with the central leadership.
3. Social Policies: Social policies, including education, health, and welfare, can also be contentious. Coalition partners may have different priorities and approaches to addressing social issues, leading to disagreements and compromises.
4. Infrastructure Projects: Large infrastructure projects often require land acquisition and environmental clearances, which can be contentious. Different coalition partners may have varying stances on these issues, leading to delays and modifications in project plans.

Areas of Cooperation:

1. Rural Development: Given the significant losses the BJP experienced in rural areas, there is likely to be a strong focus on rural development. Coalition partners, especially those representing rural constituencies, can work together to formulate and implement policies aimed at alleviating rural distress and boosting agricultural productivity.
2. Manufacturing and Employment: There is a broad consensus on the need to expand manufacturing and create jobs. Initiatives like the Production Linked Incentive (PLI) scheme are likely to receive support from all coalition partners, leading to cooperative efforts to boost industrial growth.
3. Healthcare and Education: Improving healthcare and education is a priority that transcends political divides. Coalition partners can collaborate to enhance public health infrastructure and educational outcomes, benefiting the population at large.
4. Environmental Sustainability: Environmental issues such as clean energy, waste management, and climate resilience are areas where coalition partners can find common ground. Collaborative efforts can lead to sustainable policies that address both economic and environmental concerns.

Welfare Spending and Rural Economic Stimulus

Expected Increase in Welfare Spending

The 2024 election results have highlighted a crucial need for the government to address the growing concerns of rural distress and economic disparities. In response, the newly formed BJP-led NDA government is expected to significantly increase welfare spending. This strategic move aims to alleviate rural distress, stimulate economic activity, and restore confidence among rural voters who felt neglected in previous years.

Key Aspects of Increased Welfare Spending

1. Budget Allocation: It is anticipated that the government will raise welfare spending from the previous level of 1.6 per cent of GDP to 2 per cent. This represents a substantial increase in budget allocation, amounting to an additional Rs 1.2 trillion.
2. Targeted Programs: The focus will be on targeted welfare programs that directly impact rural households. This includes enhancements to existing schemes like the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and the Pradhan Mantri Kisan Samman Nidhi (PM-KISAN).
3. Direct Benefit Transfers: Expanding the scope and efficiency of direct benefit transfers (DBT) will ensure that subsidies and financial aid reach the intended beneficiaries promptly and without leakages.
4. Health and Education: Investment in rural health and education infrastructure is likely to be prioritized. This includes building more health centres, improving school facilities, and launching nutrition programs for children and pregnant women.

Focus on Rural Distress and Economic Recovery

The election results underscored the significant voter dissatisfaction stemming from rural distress, which was exacerbated by the COVID-19 pandemic. The government's strategy to address these issues will be multifaceted, aiming not only to provide immediate relief but also to foster long-term economic recovery in rural areas.

Components of the Focus on Rural Distress:

1. Agricultural Support: Increasing minimum support prices (MSPs) for key crops, providing crop insurance, and offering subsidies on fertilizers and seeds will help mitigate the financial risks faced by farmers.
2. Infrastructure Development: Developing rural infrastructure, including roads, irrigation systems, and digital connectivity, will enhance productivity and access to markets, thereby boosting rural economies.
3. Microfinance and Credit Access: Expanding microfinance programs and improving access to credit for small and marginal farmers will empower them to invest in better farming techniques and equipment.
4. Skill Development: Initiatives aimed at skill development and vocational training will prepare the rural workforce for diverse employment opportunities beyond agriculture, promoting inclusive growth.

Sectors Likely to Benefit from Increased Rural Spending

The anticipated increase in welfare spending and focus on rural economic recovery will have a ripple effect across various sectors, driving growth and investment opportunities.

1. Agriculture and Allied Sectors:

• Farm Equipment Manufacturers: Companies producing tractors, harvesters, and other agricultural machinery will see increased demand as farmers invest in modern equipment.
• Fertilizers and Agrochemicals: Enhanced support for crop inputs will boost sales for companies in the fertilizers and agrochemicals sectors.
• Irrigation Solutions: Firms providing irrigation technology and solutions will benefit from government initiatives to improve water management in agriculture.

2. Consumer Goods:

• Fast-Moving Consumer Goods (FMCG): Increased rural incomes and direct benefit transfers will lead to higher consumption of FMCG products, benefiting companies in this sector.
• Durables and Electronics: As rural households gain more purchasing power, the demand for consumer durables, such as refrigerators, washing machines, and televisions, is expected to rise.

3. Financial Services:

• Microfinance Institutions: With a focus on improving credit access, microfinance institutions will play a pivotal role in providing financial services to rural communities, driving their growth.
• Banks: Banks with strong rural outreach will benefit from increased deposits and loan disbursements, particularly those engaged in agricultural finance and rural development schemes.

4. Infrastructure and Construction:

• Rural Roads and Connectivity: Companies involved in the construction of rural roads, bridges, and digital infrastructure will see new opportunities as the government prioritizes connectivity.
• Housing: With better economic conditions, demand for rural housing and related construction materials is likely to increase, benefiting construction firms and material suppliers.

5. Healthcare and Education:

• Healthcare Providers: Investments in rural healthcare infrastructure will drive demand for medical equipment, pharmaceuticals, and healthcare services in rural areas.

Education Services: Companies providing educational resources, digital learning tools, and infrastructure development for schools will benefit from increased spending on rural education.