In a surprising turn of events, India's recent general elections have brought about a negative twist, revealing the ruling NDA's return with a diminished majority. Despite expectations for a strengthened position, the NDA is now expected to secure around 290-300 seats, falling short of the robust majority predicted by exit polls. Particularly noteworthy is the BJP's performance, falling significantly shy of the majority mark with an anticipated 230-240 seats on its own.
While Narendra Modi is poised to secure a third term as PM, the landscape he faces will be notably altered. The BJP may find itself reliant on regional allies like Telugu Desam and Janata Dal (Secular), necessitating policy adjustments. Moreover, there will likely be heightened pressure to bolster economic consumption, both from the BJP and its allies. Though there's speculation about a potential opposition-led government, such a scenario appears improbable.
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Despite these political shifts, the fundamental trajectory of India's economy is expected to remain largely unchanged. Manufacturing will retain its emphasis, particularly due to its role in job creation. While there may be a slight tilt towards stimulating consumption, the overall impact is anticipated to be minimal. Although state budget deficits may widen, the consolidation of the central fiscal deficit seems secure. However, the pace of capital expenditure might slacken temporarily as government priorities adjust, leading corporates into a cautious stance.
Unfortunately, the prospects for significant reforms appear dim. Factor market reforms and privatization efforts are likely to stall, potentially impacting government spending in the short term. Even political reforms, such as electoral harmonization, seem improbable at this stage.
Market sentiment is expected to take a hit, with higher perceived risks for India prompting a short-term derating. Sectors like PSUs and capital goods are deemed most vulnerable, while consumer-focused industries, such as FMCG and value retailing, are anticipated to thrive. Healthcare is also viewed favorably.
Emkay Global advises investors to adopt a cautious stance, remaining neutral until further clarity emerges. However, they suggest a buying opportunity may arise if the Nifty corrects below 20,000, indicating an attractive valuation at less than 18 times PER. Detailed portfolio adjustments will be provided in a subsequent report.
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