Sensex, Nifty rally: What Nomura, CLSA, others say on fiscal risk ahead of 2024 elections

As stock indices Sensex and Nifty hit fresh all-time high in Monday's trade after a sweeping victory for BJP in three state elections increased prospects of the Narendra Modi-led BJP getting the third term next year, Nomura India said the outcome also lowered stock market fears of fiscal populism in the run up to the elections.

"As some investors were worried that a poor showing by BJP in the state elections would increase the risk of more fiscal populism, the actual results should calm such fears. However, we believe that competitive populism will remain a theme for the 2024 general elections," said Nomura India.

The state election results, Elara Securities said, should offer succour to the market that has been worried about policy instability and shake-up in policy priorities of the BJP at the Centre namely Atmanirbhar Bharat, accelerated infra spending, defence indigenisation, energy transition and continued focus on sound macro-fundamental policies. 

Elara said the most critical schemes of the BJP and the Congress governments show incremental spending of Rs 48,800 crore in the next one year.  "With significant amount of spending lined up in rural India and the agriculture sector, such as likely hike in PM Kisan amount and higher MGNREGA allocation, higher fertilsier subsidy as well taking into account the free handouts announced in the assembly elections of five states, focus is shifting to higher revenue spending and pre-election related handouts," Elara said.

Also read: Stock market: Sensex, Nifty may hit new highs as BJP eyes hat-trick in 2024 elections

CLSA expects the governments to spend up to Rs 1 lakh crore ($12 billion)  or 0.25 per cent of GDP to limit rural stress in response. It noted that anti-incumbency has changed governments in four of eight state polls in 2023.

The central government recently cut LPG prices by 20 per cent, reducing CPI inflation by 25 basis points, at a fiscal cost of Rs 7,600 crore. It added the Union cabinet just extended the monthly free 5kg rice/wheat scheme for 60 per cent of population for five years.

BJP did not name any Chief Ministerial candidate in the run-up to the state elections, essentially campaigning under the brand of PM Modi. The strategy, Nomura said, did not yield results in the Karnataka elections but seems to have worked in the Hindi heartland states.

"Also, competitive populism has remained a dominant theme in state elections, not just with the INC, but also the BJP. The BJP’s state campaigns have tried to stay in lock-step with the INC on populist promises, particularly schemes supporting women and girls, over and above PM Modi’s announcement of the free food scheme (although we have argued that the fiscal impact of this scheme is likely to be limited)," Nomura India said.

Kotak Institutional Equities expects election-linked market volatility to remain low, which may result in the market trading at rich valuations in the near term.

Also read: Sensex, Nifty: BJP win in 3 state elections to give stock market a gap-up opening  

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