India's stock market suffered its worst decline in four years after Indian Prime Minister Narendra Modi's Bharatiya Janata Party (BJP) lost its parliamentary majority.
The surprise result of Tuesday's election count means Modi will have to rely on smaller parties to form a ruling majority in the 543-member Lok Sabha, the lower house of India's parliament, raising uncertainty about the Indian leader's ability. to carry out their pro-business agenda. .
The NSE Nifty 50 and BSE Sensex indices closed down 5.93 per cent and 5.74 per cent, respectively, on Tuesday, after falling as much as 8.5 per cent earlier in the day.
Indian stocks posted fresh losses on Wednesday morning before recovering in the afternoon, with the two indices each rising more than 1.5 percent as of 05:30 GMT.
Why did investors react negatively to the election result?
Investors have been overwhelmingly favorable to Modi's economic agenda throughout his decade-long rule.
Vowing to transform India into a developed nation by 2047, Modi has directed massive investments in infrastructure, championed domestic manufacturing, attracted foreign investment, reduced bureaucracy and promised to root out corruption.
Under the Indian leader, the Nifty 50 index has nearly tripled in value, although some analysts argue that many Indian companies are now overvalued.
Earlier this year, India's market capitalization surpassed $4.3 trillion, overtaking Hong Kong as the world's fourth-largest market.
Ahead of Tuesday's surprise election result, Indian stocks rose to record highs as exit polls showed the BJP-led National Democratic Alliance (NDA) was on course for a landslide victory.
Modi, a popular but polarizing leader, has presided over a period of strong economic growth in the world's most populous nation.
Gross domestic product (GDP) grew 8.2 percent in the fiscal year that ended in April, far outpacing most developing and developed economies alike.
Over the last decade, GDP per capita has increased from about $5,000 to more than $7,500.
During that time, India went from being the ninth largest economy in the world to the fifth largest.
While Modi has all but secured a third term as prime minister, his need to negotiate with smaller constituencies in his coalition raises the possibility that he may have to compromise on aspects of his economic agenda.
“A very high majority for the BJP-led NDA would have meant a greater appetite for reforms and a limited need for populist measures, and a continued capital expenditure agenda,” said Garima Kapoor, economist and senior vice president at Elara Capital in New Delhi. Al Jazeera.
“Markets are reassessing this shift and hence most public sector units, public sector banks and capex-driven equities 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.
“Greater, less controversial infrastructure investment is likely to remain a key focus,” Hermann told Al Jazeera.
However, perhaps more than anything else, markets hate uncertainty, a dynamic generated 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 by who is in power.
Whatever direction Modi's coalition takes, the country will continue to benefit from a huge, relatively young population.
New Delhi, which has traditionally pursued a policy of non-alignment, is likely to continue to benefit from its distancing itself 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 is supported by long-term tailwinds from favorable population demographics and widespread geopolitical tensions between China and the US that favor a shift towards India,” Gary Tan, a portfolio manager at Allspring Global Investments, told Al Jazeera.
Elara Capital's Kapoor said he did not believe the election result would lead to a big long-term policy change.
“In the long run, an NDA of 290 or 310 does not make much difference in terms of policy approach. Overall, the shift comes primarily in terms of whether we see aggressive supply-side reforms or we see a balance between supply-side and demand-side reforms,” he 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 problems is the shortage of quality jobs that meet the needs of its enormous 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 available jobs.
“Beyond a narrow view of the unemployed, there is a large proportion of young people, particularly young women, who are not in education, work or training,” the UN body said.
Tan said India's rising household debt is another concern.
“The Reserve Bank of India has been intervening to control this risk. While positive for a more sustainable growth path, the short-term cost may result in slower credit growth at an important time in India, where capital spending by private companies is looking to catch up with to previous years of underinvestment along with the launch of large companies. infrastructure projects at scale,” he stated.
After years of soaring profits, some analysts believe many Indian companies are now overvalued, partly due to a huge influx of small local investors with no experience in 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,” Morning Star quoted Franklin's Chetan Sehgal Templeton.
