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How will India's economy fare under Modi 3.0?

No major long-term hiccups in the Indian economy likely

Indian stocks suffered their worst intraday fall since March 2020 on Tuesday and foreign investors sold the most on record as the ruling Bharatiya Janata Party (BJP) lost ground in key states in India’s federal elections, falling short of a majority on its own.

The NSE Nifty 50 index closed down 5.93 per cent at 21,884.5 points, and the S&P BSE Sensex fell 5.74 per cent to 72,079.05, Reuters reported. The benchmarks fell as much as 8.5 per cent earlier in the day, after hitting record highs on Monday.

Despite the losses, Prime Minister Narendra Modi is set to return to power with support from his allies in the National Democratic Alliance. As a result, economists and analysts believe that there will be no major long-term hiccups in the Indian economy as the incumbent government’s policies are likely to be continued.

One of Modi’s key ambitions for his third five-year term as Prime Minister is to grow the manufacturing sector as a share of gross value added (GVA). His ‘Make in India’ initiative forms a key part of the strategy to achieve this, aiming to attract foreign direct investment into 14 key sectors. However, the policy’s success has been debatable. “While it is likely that there is a fresh push in Modi’s prospective third term, headwinds remain and there are clear areas for policy improvement such as reducing import tariffs,” EFG economist Sam Jochim said in a note.

Infrastructure development will form another key area of focus for Modi. In his first ten years as Prime Minister, he focussed on building roads and electrifying railways. These infrastructure targets were ambitious and often they were not achieved, but in attempting to reach them, there was often a significant acceleration in progress. In his third term it is likely that the focus shifts to producing more electric vehicles and developing infrastructure which will help India in its efforts to achieve net-zero by 2070, EFG analysts noted.

In the BJP’s 2019 election manifesto, the party pledged to construct 60,000 km of national highways by 2024 and electrify all railway tracks by 2022.Modi’s party has failed to meet these goals. At the end of 2023 there were 146,145 km of national highways in India, 49,600 km above the level in 2019, and 94% of railways had been electrified by the start of FY 2024, EFG said. “Infrastructure development will remain a key area of focus for Modi in his next five-year term. However, it is not a sustainable policy to keep building roads at the same pace, as the marginal benefit of each additional road diminishes, and there will be no railway left to electrify. The focus is therefore likely to shift,” Jochim said.

Two major Modi-linked conglomerates, Reliance and Adani, suffered some of the worst on the stock markets on Tuesday. Looking ahead, given the analyst expectations that the current leadership stays with BJP, though there will be a drop triggered by the fractured mandate, the drop will not be massive, providing an opportune moment for investors who had previously missed the rally, analysts said.

With regard to the stocks to watch, Public Sector Undertaking (PSUs), companies that are owned at least 51 per cent by the government have been on a rally for the past year may face a short term pullback, as a strong government mandate and the majority would be required for undertaking major decisions in PSUs, and if the NDA was to ally with other parties, a significant consensus would be required for major decisions, according to Vijay Valecha, Chief Investment Officer, Century Financial.

Among non-PSUs, Consumer discretionary and consumer staples industries are expected to garner the highest investor interest as generally post elections, policies pertaining to social welfare are released to curb discontent, resulting in increased disposable income of citizens. With regard to stocks to watch out for, Adani Group stocks, are expected to garner interest as these are often gained in light of increased infrastructure spending, and given that they are down by over 21%, offer a favorable entry point for investors. “Other non-PSUs to watch out for include Bharti Airtel, Indian Hotels, ACC, Reliance Industries, L&T, and Vodafone Idea,” Valecha said.

On the contrary, though there is a slim probability of this occurring, if the NDA fails to form the government, investors can look out for consumer-defensive stocks, like Hindustan Unilever, Avenue Supermarts, and Dabur, he added.