On June 4, 2024, Indian Prime Minister Narendra Modi gestured at the headquarters of the Bharatiya Janata Party (BJP) in New Delhi, India.
Adnan Abidi | Reuters
In a shocking political setback for Prime Minister Narendra Modi, the country’s business executives have been calling in to try to better understand the impact on India’s economic and investment landscape after he failed to secure an outright majority for his party.
“Indian voters are great teachers. They really surprise politicians, exit pollsters and market watchers,” Venugopal Garre, managing director at AB Bernstein, wrote in an email to clients.
Over the past few years, CEOs of some of America’s largest companies have invested time and money in building relationships with Modi as they set their sights on the Indian market.
General Electric aerospace, apple, Starbucks and Nvidia is among a number of companies that have made high-profile deals to expand, manufacture and sell their products domestically.
“As China’s economy slows down, India has become a top destination for U.S. tech giants,” Pramit Chaudhuri, head of Eurasia’s South Asia operations, told CNBC on Tuesday.
Indian stocks sold off on Monday, posting their biggest drop since 2021, following the surprise election results.
Rahul Sharma, emerging markets portfolio manager at investment firm Shafer Cullen, which manages $6 billion in assets, said the results were “clearly negative and could impact markets in the short term.”
However, Sharma remains bullish on India over the long term, citing the country’s strong demographics.
“Don’t forget the huge potential of the country, with per capita income still at such a low level, but with its huge advantages, such as a large, young and relatively well-educated workforce,” Sharma said.
Modi’s economic agenda
Modi’s failure to secure an outright majority for his party has also raised new questions about his government’s broader economic agenda.
Specifically, whether its promised reforms will be passed as quickly as Modi promised during his campaign.
“Coalition governments always run into trouble, especially when it comes to formulating economic plans,” Asia Society’s India team wrote in a note to clients.
“Most economic reforms require persuasion from India’s leaders…to negotiate…with bipartisanship, which could extend the time it takes to get things done,” a former administration official told CNBC in a private conversation.
The question is whether Modi can move from governing as a majority leader to governing as a consensus builder.
Modi aims to make India the world’s third largest economy by 2027.
But India’s eye-popping gross domestic product last year masks high unemployment that is eroding the career prospects of young workers and forcing millions to leave cities and return to rural communities.
“The unemployment situation in the country has definitely contributed to electoral tensions,” Eurasia’s Chaudhry said.
“With the labor market recovery not yet widespread, a lack of job opportunities is voters’ biggest concern,” analysts at TS Lombard wrote in a note to clients on Tuesday.
Now, a labor law that Modi’s government intends to reform may not be implemented because his party, the Bharatiya Janata Party (BJP), no longer has an absolute majority in parliament.
The reforms proposed by Modi would simplify laws on hiring and firing workers and remove other barriers to a more flexible labor market.
Other analysts said key reforms related to agriculture and land acquisition may also take more time to implement than previously expected. Infrastructure projects should continue, but as with other industries, the pace is likely to slow.
U.S. investment
In the short term, new governance dynamics in India’s parliament may require a recalibration of U.S. corporate expectations. Under a coalition government, some reforms may take more time.
But experts say U.S. companies still see India as a core part of their long-term strategy to diversify manufacturing and supply chains rather than rely solely on China.
Raghuram Rajan, former governor of the Reserve Bank of India, said: “I don’t think the expansion of U.S. companies in India should be affected by the election results.”
He added that U.S. investment never “came in because of reforms, and this affects investment.” Rajan is currently a professor of finance at the University of Chicago Booth School of Business.
reduce social tensions
Shafferkaran’s Sharma predicts that the BJP’s “aggressive Hindu nationalist” rhetoric will soften after the election, “which will reduce divisions and tensions in the country”.
The Indian leader has faced criticism for his treatment of minorities such as Sikhs and Muslims and his government’s efforts to silence political opposition.
On May 30, 2024, supporters of the ruling Bharatiya Janata Party (BJP) held paper cutouts of Indian Prime Minister Narendra Modi at a campaign rally in Amritsar.
Narinder Nanu | AFP | Getty Images
Gavekal Research analyst Tom Miller wrote on Wednesday that the election results “may make India’s social position more secure if it prevents the BJP from pursuing hard-line Hindu nationalist policies.”
Jitania Kandhari, head of macroeconomic research in Morgan Stanley’s emerging markets equity team, said once the new government is formed, the next big event will be the release of the annual budget on July 1.
“This will set the tone and response (in terms of spending priorities) of the new administration,” Kandari wrote in an email to CNBC.
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