India elections: Why Modi’s narrow victory sent the stock market crashing | Financial markets

India’s stock market suffered its worst drop in four years after Indian Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) lost its parliamentary majority.

The shocking result of Tuesday’s election count means Modi will have to rely on smaller parties to form a governing majority in the 543-member Lok Sabha, the lower house of India’s parliament, increasing uncertainty about the Indian leader’s ability to pursue its pro-business agenda. .

The NSE Nifty 50 and BSE Sensex indices closed 5.93% and 5.74% lower respectively on Tuesday after falling as much as 8.5% earlier in the day.

Indian shares posted fresh losses on Wednesday morning before recovering in the afternoon, with both indices up more than 1.5% each at 0530 GMT.

Why did investors react negatively to the election results?

Investors have been overwhelmingly supportive of Modi’s economic agenda throughout his decade-long tenure.

Pledging to transform India into a developed nation by 2047, Modi directed massive investments in infrastructure, defended domestic production, attracted foreign investment, reduced bureaucracy and promised to eradicate corruption.

Under the Indian leader’s watch, the value of the Nifty 50 index has almost tripled – although some analysts argue that many Indian companies are now overvalued.

Earlier this year, India’s market capitalization surpassed $4.3 billion, overtaking Hong Kong as the world’s fourth-largest market.

Ahead of Tuesday’s surprise election result, Indian stocks rose to all-time highs as exit polls showed the BJP-led National Democratic Alliance (NDA) was on track for a landslide victory.

Modi, a popular but polarizing leader, has presided during a period of strong economic growth in the world’s most populous nation.

Gross Domestic Product (GDP) grew 8.2% in the fiscal year that ended in April, far outpacing most developed and developing economies.

Over the past decade, GDP per capita has increased from about $5,000 to more than $7,500.

During this period, India went from being the ninth largest economy in the world to the fifth largest.

Although Modi has all but secured a third term as prime minister, his need to negotiate with smaller constituents of his coalition raises the possibility that he will have to make concessions on aspects of his economic agenda.

“A very high majority for the BJP-led NDA would mean greater appetite for reforms and limited need for any populist measures and continuation of the capital expenditure agenda,” said Garima Kapoor, economist and senior vice-president at Elara Capital in New Delhi. Al Jazeera.

“Markets are re-evaluating this change and therefore most public sector units, public sector banks and capital expenditure-led stocks are seeing a sharp correction.”

Alexandra Hermann, senior economist at Oxford Economics, said Modi’s smaller-than-expected majority would make it more difficult to pass reforms related to land, labor and capital regulations.

“Other – less controversial – investments in infrastructure will likely continue to be a main focus,” Hermann told Al Jazeera.

But perhaps more than anything else, markets hate uncertainty – a dynamic provided by Tuesday’s less-than-emphatic result.

How will the elections affect India’s economic policies?

Many of India’s economic advantages are not affected by the outcome of elections, or even who is in power.

Whatever direction Modi’s coalition takes, the country will still benefit from a huge, relatively young population.

New Delhi, which has traditionally followed a policy of non-alignment, is also expected to continue to benefit from its distance from the geopolitical rivalry between the United States and its allies, on the one hand, and Russia and China, on the other.

“We do not believe the election outcome will affect the long-term prospects of the Indian market, which are supported by long-term tailwinds of favorable population demographics and the lingering geopolitical tensions between China and the US that favor a shift to India,” Gary Tan, a portfolio manager at Allspring Global Investments, told Al Jazeera.

Kapoor of Elara Capital said he did not believe the election result would lead to a major change in policy in the long term.

“In the long run, the NDA at 290 or 310 does not mean much difference in terms of political approach. Overall, the change is mainly in terms of whether we see aggressive supply-side reforms or we see a balance between supply-side and demand-side reforms,” she said.

Will India’s stock market boom last?

Despite India’s impressive GDP growth, the country’s economy faces serious challenges, including widespread poverty, growing inequality and widespread corruption.

Among the most pressing issues is the scarcity of quality jobs that meet the needs of its huge population.

In a report released earlier this year, the International Labor Organization warned of a “mismatch” between the aspirations of India’s educated youth and the jobs available.

“In addition to a narrow view of the unemployed, there is a large proportion of young people, especially young women, who do not study, work or receive training,” said the UN body.

Tan said India’s rising household debt is another concern.

“The Reserve Bank of India has intervened to control this risk. While positive for a more sustainable growth trajectory, the short-term cost could result in slower credit growth at an important juncture in India, where private corporate capital expenditure is looking to catch up with previous years of underinvestment, along with with the implementation of large investments. large-scale infrastructure projects,” he said.

After years of roaring gains, some analysts believe many Indian companies are now overvalued, in part due to a huge influx of small, inexperienced local investors into the market.

In an analysis last month, financial services firm Morning Star cited a portfolio manager who noted that Indian stocks were trading at higher prices than other emerging markets.

“We remain selective in the companies we invest in and favor those that have sustainable earnings power and whose share prices are at a discount to our estimate of their intrinsic value,” Chetan Sehgal of Franklin Templeton told Morning Star.