With just two phases remaining out of the seven Lok Sabha 2024 votes, the elections are almost over. In light of this, the markets have been erratic, with the Nifty50 and the S&P BSE Sensex unable to hold onto gains.
Although the majority of observers anticipate that the current National Democratic Alliance (NDA) administration, headed by Bharatiya Janata Party's Narendra Modi, will serve as prime minister for a third straight term, they noted that the party's demand for more than 400 seats in the upcoming elections may prove to be an overwhelming challenge.
In the worst case scenario, Bernstein analysts predict "heavy profit booking" in the markets with little to no returns for the markets this year if the NDA is unable to achieve a majority (seats fewer than 272).
According to Bernstein, business sentiment would likely fall in the near future. Tax reductions and subsidies for the impoverished might be funded by higher taxes on corporations or the wealthy. Moreover, foreign direct investment will decline. In such a scenario, Bernstein anticipates significant government salary expenditures, higher MGNREGA pay, and a strong rise in the fiscal deficit, which it believes may surpass 5.2% for both the current and upcoming fiscal years.
"Infrastructural impacts will be severe in the near future. Money intended for infra developments will now go into social programs. The drive for the private sector to engage in infrastructure will result in the shelving of less feasible projects and the emergence of just the most viable ones. The distribution of 10 kg of free food will cause stockpiles to run out, while salary increases under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and universal basic income (UBI) would stimulate demand for other items. In a note co-authored with Nikhil Arela, Venugopal Garre, Managing Director at Bernstein, predicted that inflation will rise beyond 6% in the near future.
However, Bernstein did not project that the NDA would win fewer than 270 seats in the Lok Sabha. According to them, there is a greater chance that the 330–350 seats will cause a market surge following the election results. They predict that the Nifty 50 index would rise beyond 23,00, but that soon the results of the general election are announced, there will be a quick profit booking.
"After talks about 400 vs 300 versus 250, the attention will soon go to macro fundamentals and new government programs, which is a welcome change. Equity markets were aware of the persistence of power, which is why we saw a rally in November and December 2023. However, repeating the same theme again and over again produces ridiculous valuation results. Therefore, we think that ultimately, the emphasis will shift back to macro, profits growth, reasonable values, etc.," noted Garre.
Rahul Arora, Chief Executive Officer of institutional equities at Nirmal Bang, said that the markets don't think the NDA would surpass 400 and that the story of the "Abki Baar 400 Paar" will hold true.
Nevertheless, at this point, the markets are presuming that the present regime will return with an absolute majority. They are not obsessed with any certain Lok Sabha figure or tally, according to Arora.
