Indian Prime Minister Narendra Modi gestures at the Bharatiya Janata Party (BJP) headquarters in New Delhi, India, on June 4, 2024.
Adnan Abidi | Reuters
A stunning political setback for Indian Prime Minister Narendra Modi has business managers in the country making angry calls, trying to better understand the impact on India’s economy and investment landscape after Modi failed to secure his party a supermajority.
“Indian voters are great teachers. They certainly surprised politicians, pollsters and market observers,” Venugopal Garre, CEO of AB Bernstein, wrote in an email to clients.
In recent years, chief executives of some of the largest companies in the United States have invested time and money in relationships with Modi as they set their sights on the Indian market.
GE Aerospace, Apple, Starbucks And Nvidia are among the companies that have struck high-profile deals to expand, manufacture and sell their products in the country.
“As China slows, India is the preferred destination for US tech giants,” Pramit Chaudhuri, head of Eurasia’s South Asia division, told CNBC on Tuesday.
The Indian stock market witnessed a sell-off on Monday following the surprise election results – its biggest drop since 2021.
The result is “a clear negative that is likely to create an overhang in the market in the near term,” said Rahul Sharma, emerging markets portfolio manager at Shafer Cullen, an investment firm with $6 billion in assets under management.
However, Sharma remains a long-term optimist for India, citing the country’s strong demographic profile.
“Don’t forget the country’s enormous potential, with per capita income still so low and enormous advantages such as a large, young and relatively well-educated workforce,” said Sharma.
Modi’s economic agenda
Modi’s failure to secure a supermajority for his party also raises new questions about the Modi government’s broader economic agenda.
Specifically, it is about whether the promised reforms will be implemented quickly, as Modi promised during the election campaign.
“Coalition governments always get into trouble, especially when they are designing economic plans,” Asia Society’s India team wrote in a note to clients.
“Most economic reforms will require the Indian leader to persuade, negotiate, work with the parties on the other side, which could extend the time frame for getting things done,” a former government official told CNBC, the for The discussion was granted anonymity for private conversations.
The question is whether Modi can move from governing as a supermajority leader to governing as a consensus builder.
Modi’s goal is to make India the world’s third largest economy by 2027. It is currently the world’s fifth-largest economy and grew 8.2% in the fiscal year ended March.
But India’s staggering GDP last year masks a high unemployment rate that is hurting the career prospects of younger workers and driving millions of people out of cities and back into rural communities.
“The unemployment situation in the country certainly contributed to a more difficult election,” said Chaudhuri from Eurasia.
“The lack of jobs is voters’ biggest concern.” [the] “The recovery in the labor market does not yet have a broad basis,” wrote analysts at TS Lombard in a note to clients on Tuesday.
Now, one of the labor laws that Modi’s government wanted to reform may not be implemented because Modi’s party, the Bharatiya Janata Party (BJP), no longer has an absolute majority in Parliament.
Modi’s proposed reforms would have simplified laws governing hiring and firing workers and removed other barriers to a more flexible labor market.
Other analysts say implementing key reforms related to agriculture and land acquisition could also take longer than previously expected. Infrastructure projects should continue, but perhaps at a slower pace, as in other sectors.
American investment
In the near term, new governance dynamics in India’s parliament may require a reset of corporate expectations in the United States. Some reforms could take more time under a coalition government.
But experts say U.S. companies still view India as a central part of their longer-term strategies to diversify production and supply chains beyond mere dependence on China.
Read more about CNBC’s politics coverage
“I don’t think US companies’ expansion into India should be affected [by the election results]said Raghuram Rajan, former governor of the Reserve Bank of India.
He added that American investments were never made “as a result of reforms that affected those investments.” Rajan is currently a professor of finance at the University of Chicago Booth School of Business.
Shafer Cullen’s Sharma predicted that the BJP’s “aggressive Hindu nationalist” rhetoric will soften the by-election, “which will reduce division and tension in the country.”
The Indian leader has faced criticism over his treatment of minorities, including Sikhs and Muslims, and his government’s efforts to silence political opposition.
Supporters of the ruling Bharatiya Janta Party (BJP) hold figurines of Indian Prime Minister Narendra Modi during an election rally in Amritsar on May 30, 2024.
Narinder Nanu | Afp | Getty Images
The election results “could make India socially safer if it deters the BJP from pursuing tough Hindu nationalist policies,” Tom Miller, an analyst at Gavekal Research, wrote on Wednesday.
“Once the new government is formed, the next big event will be the release of the annual budget on July 1,” said Jitania Kandhari, head of macroeconomic research in Morgan Stanley’s emerging markets equity team.
“This will set the tone and response of the new administration (on spending priorities),” Kandhari wrote in an email to CNBC.
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2024-06-05 22:25:09
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