As PM Modi seeks third term, will it be good for Indian economy and markets? UBS decodes

General Elections have been announced in India and the Model Code of Conduct (MCC) comes into effect with the announcement. While political pundits are busy with their prediction proceedings for the upcoming elections, the global brokerage firm UBS has shared its views on three possible election outcomes and their impact on the economy and markets.

UBS has shared its views on three potential scenarios: a BJP single-party majority; a BJP-led coalition; and a coalition led by the INDIA alliance. However, the brokerage has not assigned a probability to each scenario.  "However, our discussions with investors and valuation multiples suggest the first two are largely priced in by the market, " said the overseas brokerage firm.

Various opinion polls have been suggesting the Bharatiya Janata Party (BJP) is headed for another landslide victory, led by Prime Minister Narendra Modi, giving him a third term in a row. On the contrary, the jeopardized INDIA alliance is looking to leave no page unturned in terms of electoral prowess.

In the first scenario, that is if BJP gets a complete victory, UBS thinks that the focus would be on policy continuity, which could bode well for business sentiment and the much-anticipated private corporate capex recovery.

"In addition, further progress in supply-side reforms could be seen, including the clean energy transition, higher infrastructure spending, a manufacturing push and other targeted policy initiatives towards the youth, poor, women and farmers," it added.

In the second scenario, where it assumes a coalition government led by the BJP, reform momentum remains broadly similar, but some tough policies may not progress and/or are likely to be put on hold, including disinvestment, a land bill and a uniform civil code, said UBS. "However, comfort about fiscal discipline could be less of a concern for investors in this scenario," it adds.

In the third scenario, where the INDIA alliance comes into power, dethroning Narendra Modi-led BJP Government, the economic policy approach would be largely aligned, but markets could have concerns about fiscal discipline and a less decisive government, leading to lags in implementing supply-side reforms, said the international banker. "There could also be a delay in the private corporate capex recovery due to weaker business confidence caused by the surprise political outcome," UBS added.

The Election Commission of India announced the schedule for the General Elections 2024, which will be conducted across the country in the seven phases. The first phase will begin on April 19 and conclude on June 1. The results of the electoral process will be declared on June 4.

Election manifestos are released by political parties to outline their promises/priorities and generally cover all key aspects related to economic, social, development and governance issues. Political parties are not legally obligated to fulfil their manifesto
promises.

UBS analyzed the general election manifestoes of last four elections and concluded that the Modi government was better in fulfilling their stated manifesto compared to Congress. The Modi government's focus on balancing economic reforms with social welfare schemes for the bottom of the pyramid seems to have worked in their favour.

"Besides economic reforms, recent opinion polls suggest the government's handling of COVID-19, building the Ram Temple and the revocation of Article 370 have helped bolster support," said UBS. "However, unemployment and inflation remain key concerns."