Indian Voters Deliver a Surprising Verdict: Coalition Politics Likely to Return
2024.06.04 10:59
In a surprising turn of events, the Indian electorate has defied exit poll predictions, suggesting a weaker mandate for Prime Minister Modi’s National Democratic Alliance (NDA). As vote counting continues, preliminary results indicate that Modi’s Bharatiya Janata Party (BJP) is leading but is unlikely to secure a majority on its own, with projections showing the BJP winning between 230-240 seats, a significant drop from the 303 seats it secured in 2019. This shortfall implies a return to coalition politics after a decade of single-party dominance.
The NDA, led by the BJP, is expected to win 285-300 seats, down from 353 in 2019, losing ground in key states such as Uttar Pradesh and Maharashtra. Meanwhile, the opposition alliance, I.N.D.I. (Indian National Democratic Inclusive Alliance), has performed better than anticipated, projected to secure 230-240 seats, a substantial increase from their 91 seats in 2019.
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Without a clear majority, the BJP will need to rely heavily on its coalition partners, shifting the balance of power within the NDA. Several potential scenarios could unfold:
1. Modi Returns with Coalition Partners: Modi may return as Prime Minister but will need to accommodate coalition partners with significant ministry portfolios. This scenario, while likely, suggests a less streamlined government compared to the past decade, where Modi’s office had strong control.
2. NDA with a New Prime Minister: The NDA could form the government with a Prime Minister other than Modi, indicating a major shift in leadership dynamics.
3. Opposition Alliance Takes Power: Key BJP alliance partners might switch sides, enabling the I.N.D.I.A. alliance to form the government, potentially leading to significant policy changes.
The market may react negatively to the election outcome due to the diminished policy visibility. Scenario 1, where Modi returns with coalition support, is considered the most market-friendly, albeit still less positive than earlier expectations. Frequent state elections, such as those in Maharashtra in 2024 and Uttar Pradesh in 2029, could influence national policy sooner rather than later.
The government might need to address mass market consumption stress, potentially diverting some fiscal resources towards populist measures. While infrastructure and capital expenditure (capex) focus may continue, flagship schemes like the Production-Linked Incentive (PLI) for manufacturing could persist, though expanding these incentives might be challenging. Reforms in agriculture, land, and direct taxes may be delayed.
This unexpected election outcome has unsettled market valuations. India’s valuations have been high relative to its corporate earnings growth and outlook, partly due to the perceived political stability and policy certainty under a strong government. These assumptions are now in question, leading to a cautious stance on Indian equities within the emerging market context. Investors are advised to screen for stocks with elevated valuations and ordinary fundamentals as potential risks.
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