With the BJP getting a weaker mandate in the 2024 Lok Sabha Elections than expected, the investment approach to India would change materially in an “extreme scenario” if the opposition manages to wrest away the key allies, says a report. Global brokerage major Bernstein Societe Generale Group, in its latest India strategy report, says the current setback may be enough for the government to tweak some of its policies and increase spending towards direct social schemes rather than focussing on a pro-growth and investment-focussed approach. “With capex likely to be driven more by the private sector as end markets are changing, the role of Government will, in any case, moderate over time, limiting material risks to the cycle.”

In the very short-term perspective, the market sell-down is a bit extreme, leaving room for a modest rebound, with capex-linked stocks leading that, the report says. Given the numbers after the election results, the continuity of power may not fully translate into continuity of policies now, but a room for a large-scale tweak is unlikely.

Bernstein believes the government's policy of pushing manufacturing and construction is the right approach, but it will take several years to succeed. In addition, the perennial distress in agri and the inability to implement structural reforms (Farm bills) are still the key challenges. “We believe it is less likely to see a dramatic change in MSP policies or a shift towards creating direct employment by absorbing them in low-productive government jobs. There can be a short-term inflationary impact (<1%) but it is likely to be limited since we do not anticipate momentous MSP increases.”

While the ground shock is playing out, the return of populism is something that is feared at this moment, says Bernstein. “In a bid to directly boost consumption - we see risks to short-term inflation, capex and, to a lesser extent, fiscal discipline.”

In terms of rural focus, Bernstein does not see a quick fix to alter the growth landscape, but over a longer term, a risk of more focus on subsidies compared to the last five years is there.

Bernstein on Election Result

Lok Sabha Results: Continuity of power may not translate into pro-growth policies now, says Bernstein