BSE on results day
A screen displays stock numbers outside the Bombay Stock Exchange (BSE) building in Mumbai, Tuesday, June 4, 2024. Image: PTI

Modi's weak mandate may prompt policy focus shift to welfare spending

BJP govt's fiscal prudence has often meant stepping back from direct measures to spur consumption; this may change in a coalition environment

If Prime Minister Narendra Modi secures a third term, but with a weaker mandate for the BJP, the fiscal policy might shift towards enhancing welfare measures to boost consumption.

The government's fiscal prudence has often meant stepping back from direct measures to spur consumption, with notable exceptions like the free food grain scheme, which will cost Rs 11.80 lakh-crore over five years starting January 1, 2024.

Consumption growth remains low

Despite India’s anticipated GDP growth of 8.2 per cent for FY24, private consumption growth remains at a 20-year low of around 4 per cent. The agricultural sector's growth is also weak, projected at just 1.4 per cent compared to 4.7 per cent in 2022-23.

In its report, financial and analytics firm S&P Global Market Intelligence said weak private consumption in India remains a huge concern, with rural demand in particular still "straggling to catch up." Rural demand is still struggling to catch up to India's strong overall growth.

The report also pointed out that food inflation has been consistently high.

Market reaction severe

The immediate market reaction to the election results has been severe. Sensex and Nifty tanked over 5 per cent as initial trends showed the BJP winning fewer seats than predicted in exit polls.

The 30-share BSE Sensex dropped 4,389.73 points, or 5.74 per cent, to 72,079.05, while the NSE Nifty tumbled 1,379.40 points, or 5.93 per cent, to 21,884.50 points at the close of market hours.

Among individual companies, 10 Adani Group firms' shares plummeted, dropping Adani Ports by 20 per cent. Other Adani stocks, including Ambuja Cements, Adani Enterprises, Adani Energy Solutions, Adani Green, NDTV, ACC, Adani Total Gas, and Adani Gas, experienced share price drops ranging from 18 per cent to 12 per cent. The total market value of all 10 Adani equities decreased by around Rs 3 lakh-crore.

Exit poll influence

These declines came after Adani stocks were top gainers in the previous session, driven by exit polls suggesting a landslide victory for Prime Minister Narendra Modi with more than 350 seats. This rebound erased all Hindenburg-era losses, pushing Adani's market capitalisation to nearly Rs 20 lakh-crore after a 16-month hiatus.

However, market confidence has been shaken by the election results, indicating a weaker mandate.

Index heavyweights like Reliance Industries Ltd (RIL) also saw their share prices decline by more than 8 per cent.

What changes now

Sheshadri Sen from brokerage firm Emkay Global said that even with a return of the NDA, the BJP is expected to fall well short of a majority. Modi will likely remain PM but face new challenges, including dependence on regional allies and increased pressure to stimulate consumption.

Sen noted that while the economy's overall direction may not change significantly, India's risk perception may increase, leading to a market derating. Investors are advised to shift focus from PSUs and capital goods to FMCG and consider buying Indian equities if the Nifty falls below 20,000, Sen said.

Key points include:

Adverse results: The NDA is expected to secure 290-300 seats, with the BJP falling short of a majority at approximately 230-240 seats. This contrasts with exit poll forecasts of a vastly improved majority.

Modi’s return with changed equations: Modi is likely to return as PM but will need to navigate a reliance on regional allies like the Telugu Desam and Janata Dal (United) and respond to greater demands for economic stimulation.

Economic trajectory: The focus on manufacturing will continue, with possible subtle shifts towards consumption stimulus. However, the state budget deficits may worsen, though the central fiscal deficit consolidation is seen as stable.

Reforms at risk: Key reforms related to land, agriculture, and labour, as well as privatisation efforts, are likely to be sidelined, impacting government capex in the short term.

Market rerating: Increased risk perception may lead to a market derating. Investors should be cautious with PSUs and capital goods while focusing on FMCG, value retailers, and healthcare sectors.

Emkay said the election outcome poses a challenge for investors, with a high likelihood of market derating. Global brokerage UBS, as quoted by reports, said the market was unprepared for this outcome.

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