ETFs
Navigate India’s Post-Election Economic Landscape with ETFs – June 17, 2024
After the unexpected results of the recent elections in India, the country’s economic scenario remains somewhat unpredictable, due to the market sentiment towards the coalition government.
Even as market sentiment remains uncertain, India’s outlook remains bright with upwardly revised growth projections for 2024 and 2025. Robust public investment and strong private consumption remain the key drivers of the country’s growth.
India’s economic forecast improved
The UN has revised India’s growth projections for 2024 upwards from 6.2% to a solid 6.9%, driven by robust domestic demand and expanding markets. manufacturing and service industries. according to commercial standard. India’s GDP growth projection in 2025 remains unchanged at 6.6%.
The IMF also adopted the same position as the UN, revising upwards the country’s growth rate. According to Reuters, the IMF projects India’s economic growth for 2024-25 to be 6.8%, up from a previous estimate of 6.5%, fueled by robust domestic demand and a growing working-age population.
The Reserve Bank of India recently announced that its rate-setting committee has revised India’s real GDP forecast for FY25 upwards to 7.20% from the estimate previous 7%, by The Economic Times. The RBI also raised its quarterly forecast for the period, now expecting growth to consistently exceed 7% for each quarter.
India’s sovereign rating on the rise
According to CNBC, S&P Global Ratings upgraded India’s sovereign rating outlook to ‘positive’ from ‘stable’, maintaining the rating at ‘BBB’, driven by robust economic growth, improved quality of public spending and political commitment strongly in favor of budgetary consolidation. According to Reuters, Citi expects further upgrades from S&P Global Ratings by the end of 2026.
Post-election political landscape
The loss of the majority and the formation of a coalition government initially caused volatility in the markets, indicating a decline in Modi’s influence. However, since the election results, markets have resumed their upward trend.
Returning to power for a third term, Prime Minister Narendra Modi and other prominent ministers in the Bharatiya Janata Party (BJP)-led NDA-III government retained key cabinet portfolios. The cabinet ensures stability while emphasizing the government’s commitment to political continuity and sustainable economic development.
Historical perspective on the market
Past performance of the Nifty 50 in election years since 2000 reveals significant trends, with elections triggering sharp market movements but stabilizing within one to six months, according to The Economic Times.
Since 2000, the Nifty 50 has only recorded negative returns once in the month following the 2004 election results. However, it recovered those losses in just five months, as shown by the performance of the Nifty 50 which has gained about 6.6% after election results since June 4.
According to Naresh Bulchandani, head of product and advisory at Merisis Wealth, quoted in The Economic Times, under the previous NDA-I and NDA-II governments, the Nifty 50 returned 62% and 88%, respectively, highlighting the fact that the the market charts its course in close relation to the corporate earnings cycle, regardless of government.
Economic implications of the coalition government
The government’s focus on increasing India’s share of global manufacturing could result in a series of business-friendly measures, encouraging companies to venture into manufacturing in the third largest economy in Asia.
Restrictive labor laws, difficulties in acquiring land and an inefficient tariff regime are proving to be significant obstacles to India gaining a greater share of the global manufacturing sector. according to the Hindus. However, according to Al Jazeeracoalition partners could potentially help the Modi government advance its stalled land and labor reform initiatives, crucial to growing the manufacturing sector.
According to Reuters, cited in the Hindu article, India aims to increase its share of the global manufacturing sector to 10% by 2047. Tanvee Gupta Jain, chief India economist at UBS, as quoted on Business Todayexpects the government to implement stricter land reforms, with more emphasis on supply-side reforms, including improving manufacturing, labor law enforcement, increasing investment in infrastructure and job creation.
According to the Economic Times, economists anticipate an increase in spending on populist measures due to coalition politics, as the government remains committed to its “Made in India” reforms. The infrastructure and manufacturing sectors are expected to take center stage with greater emphasis on social protection and support programs for the entire population.
Focus on ETFs
India’s growth remains promising regardless of the political landscape. However, uncertainties arise as the BJP fails to secure a majority, leading to the formation of a coalition government. Growing geopolitical tensions further complicate the situation.
The current government is increasingly expected to prioritize policies aimed at attracting global businesses and making India a global manufacturing hub, thereby strengthening its economic prospects. This sentiment matches the optimistic views of rating agencies.
Below, we highlight a few ETFs for investors to increase their exposure to India and tap into its economic prospects.