Addressing party workers on Tuesday evening, Prime Minister Narendra Modi signalled economic reforms will remain on track. While Modi emphasised the historic nature of the mandate—he has become the first prime minister since Jawaharlal Nehru to win a third term—a lot of his speech pointed to economic achievements during Modi 2.0.
These include India becoming the world's second-largest smartphone producer. He also referred to the ongoing initiatives to build a semiconductor manufacturing ecosystem. He said semiconductor manufacturing will be stepped up during Modi 3.0. The Tata Group, in collaboration with Taiwan's PSMC and Micron, among others, is setting up semiconductor facilities addressing various parts of the value chain.
Policies promoting these sectors will continue during the upcoming NDA government, Modi said. He also promised to support startups. India has the third-largest number of unicorns, privately held firms with a valuation of $1 billion or more, after the US and China.
Leading equity researchers emphasise reforms will remain on track. "With the BJP not garnering a majority, it increases dependence on its allies. As these allies were established as pre-poll ones and there were seat-sharing arrangements, they are likely to stock the NDA...There are no contentious topics, as the NDA had a consensus on policies," equity researcher Bernstein said.
The prospect of a stable government with policy continuity appears to have enthused the markets. The Nifty surged 735 points (Sensex 2,126) at the of trading on Wednesday, above Friday's levels.
Bernstein considers it unlikely that the two principal non-BJP components, Telugu Desam Party (TDP) and Janata Dal (United), could join the opposition INDIA alliance, describing that as a "low-probability event." It warns that any such event would be regarded as a material change.
"We assume the BJP/NDA will form the next government and continue with its economic agenda...We expect the 'new' government with its investment-led economic agenda, but it may tweak its priorities to support consumption and employment," Kotak Institutional Equities said in a report.
In his speech on Tuesday, Modi referred to the 'despair' of the economic situation when he assumed office in May 2014. In the past few years, it has been de rigueur to describe India as a bright spot in the world economy. But getting there took deft economic management. India was infamously part of the 'fragile five' during the taper tantrum of 2013. At the start of Modi 1.0, India faced the so-called twin balance sheet problem—corporates were overleveraged, resulting in the piling up of NPAs on the balance sheets of banks. As a result, they were unable to lend.
Ten years later, thanks to the implementation of the bankruptcy law, that problem is largely over, and corporates are in a position to step up private investment.
The tailwinds propelling India's growth story remain intact. These include favourable demographics and the emergence of India as a major manufacturing location, rivalling China in sectors such as smartphones. India's GDP will overtake Japan by 2025 and Germany by 2027, making it the world's third largest.
While labour reforms and simplifying land acquisition may require political consensus, other major schemes, such as the production-linked incentives (PLIs) and the semiconductor mission, will continue. The PLI scheme for 14 sectors will cost Rs 1.97 lakh crore over five years, and the semiconductor mission involves spending Rs 76,000 crore over five years on incentives. Implementing these schemes is needed to boost the share of manufacturing in GDP from the current level of 13%.
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