Lok Sabha Elections 2024: What to expect for economy if Modi wins? UBS analyses possible scenarios

As India approaches the Lok Sabha elections of 2024, most surveys indicate a favorable trajectory for the incumbent Bharatiya Janata Party (BJP). Analysts widely anticipate that a decisive mandate for the current government would ensure policy continuity and bolster investor confidence in the stock market.

UBS India Economist Tanvee Gupta Jain believes that political stability would likely lead to policy continuity, which could bode well for market sentiment. 

“During a potential third term for Modi, we would expect further progress towards digitalisation and continued policy push toward manufacturing/exports, given India's increasing footprint in global value chains,” Jain said in a report.

While not predicting the election outcome, UBS noted recent opinion polls continue to suggest that the BJP will perform well in the general election and based on these polls, Prime Minister Narendra Modi remains the most popular leader in India. 

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“The recent performance in assembly elections suggests that: a) the ‘Modi factor’; b) the perception of the work done; and c) implementation of welfare programmes worked in favor of BJP. The government has refrained from turning populist and remains on the fiscal consolidation path in the run-up to the 2024 election,” the UBS report said.

Policy reforms under different election scenarios

UBS looks at three possible scenarios: a) BJP single-party majority; b) BJP-led coalition; c) weak coalition led by INDIA alliance. Its discussions with investors and valuation multiples suggest the first two outcomes are largely priced in by the market.

In the first scenario, UBS expects the government’s focus will be on policy continuity which bodes well for business sentiment and much anticipated private corporate capex recovery.

“According to media reports, BJP seems to be already working on a 100-day plan for immediate steps be taken once the new government is formed for the 'Viksit Bharat 2047' (Developed India) plan's quick execution. In addition, the implementation of supply-side reforms could pick up including clean energy transition, increase in infrastructure spending (both digital and physical), manufacturing push and other targeted policy initiatives (towards youth, poor, women and farmers),” it said.

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Speaking on the impact on different reforms under various government scenarios, Jain expects that with the BJP being the single-largest party, fiscal prudence will be maintained, infrastructure will get priority, the digitalization push will accelerate, while the disinvestment policy push will continue.

Moreover, this scenario will also likely further boost foreign direct investment (FDI) and PLI schemes, while the rural economy will be supported with more focus on structural reforms. UBS also expects the implementation of the Uniform Civil Code will be a priority and there may be another attempt possibly to introduce the Land Acquisition Bill.

In the second scenario, where a BJP-led coalition is expected, UBS believes reform momentum could remain broadly similar, but some tougher ones may not see much progress and/or are likely to be put on hold, including disinvestment, Land Bill and Uniform Civil Code. However, comfort over fiscal discipline would be less of a concern for investors in this scenario, it said.

In the third scenario with a weak coalition led by the INDIA alliance, UBS thinks the economic policy approach could be largely aligned but the markets could have worries about fiscal discipline, and less decisive government leading to lags in implementing supply-side reforms. 

There could also be a delay in the private corporate capex recovery from weaker business confidence because of a surprise political outcome, UBS said.

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Mixed rural recovery

Over the past year, the recovery in rural demand has been rather mixed owing to weather-related uncertainty (ie, El Niño), tepid rural wage growth and the government's supply-side measures (to contain inflation). 

“However, the Modi government did not announce any substantial pro-rural populist schemes in the run up to the 2024 elections to entice voters. Instead, the government focused on inclusive growth (partly to cover pandemic shock) with expenditure on rural-focused schemes (including drinking water, employment support, housing and rural roads) up 16% CAGR over FY19-24,” the UBS report added.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.