According to a recent Citi Research report, the political and economic landscape in India is facing some noteworthy shifts following the national elections. The Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) has been re-elected, but with a significantly reduced seat count compared to previous elections. The NDA secured 291 seats, with the BJP alone winning 229 seats, falling short of the simple majority of 272 seats it held on its own in the past.
This reduction in seats, particularly in key states such as Uttar Pradesh (-29 seats), Maharashtra (-19 seats), Rajasthan (-11 seats), and Haryana (-5 seats), suggests that the BJP will need to reassess its political and economic strategies. Despite this setback, there is no clear indication of a widespread anti-incumbency sentiment, especially regarding economic policies. The NDA's majority remains comfortable compared to historical trends, and stable governance is still anticipated with continued coordination with key allies like the Janata Dal (United) and Telugu Desam Party.
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Attention now shifts to the formation of the new cabinet and the fiscal policies for the upcoming fiscal year (FY25). The NDA is also expected to maintain a majority in the Rajya Sabha, the upper house of Parliament, for the next few years.
On the economic front, Citi Research points out that the government has an additional fiscal space equivalent to 0.35% of GDP (approximately INR 1.2 trillion) for FY25. This financial leeway is attributed to higher dividends from the Reserve Bank of India (RBI) and a lower fiscal deficit for FY24, which stands at 5.6% of GDP compared to the earlier estimate of 5.8%. This buffer allows the government to continue its planned capital expenditures without significant reductions and potentially introduce new spending targeted at the poor, women, and rural areas.
The economic agenda of boosting infrastructure, manufacturing, and technology sectors is expected to continue driving India's growth. However, major structural reforms might be delayed until the NDA navigates through current political challenges. The RBI is likely to maintain its cautious stance on inflation, and no immediate changes in interest rates are anticipated, with the first potential rate cut forecasted for October.
The markets are expected to remain vigilant regarding any fiscal slippage. The RBI could intervene to prevent any significant depreciation of the Indian rupee. The upcoming budget will need to reaffirm the government's commitment to its fiscal targets, particularly as India aims for a rating upgrade.
While the political landscape has shifted, the overall economic policies are expected to remain stable with a focus on infrastructure and technology, albeit with a cautious approach towards structural reforms. The government's fiscal discipline and proactive measures will be crucial in sustaining economic growth and stability.
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