Election Outcomes and Market Probabilities: The Way Ahead

NDA Retains Single Majority (>272 seats):

With a high probability of occurrence, the expected macroeconomic impact includes a sustained
focus on fiscal prudence. Equities are likely to reach new all-time highs, while bond yields are
anticipated to decline. Additionally, the Indian Rupee (INR) is projected to appreciate.

NDA Fails to Retain Single Majority (<272 seats):

The likelihood of a scenario where no single party secures a clear majority (less than 272 seats) in the
upcoming elections is assessed to be medium to high. In such an event, the macroeconomic impact
suggests that fiscal consolidation efforts may persist, albeit with a potential deceleration in progress.
Equities could witness a period of stability, remaining range-bound until new catalysts emerge to
drive significant movements. Similarly, the fixed income market is anticipated to experience stable
bond yields within a defined range. As for the currency market, the Indian Rupee (INR) is expected to
maintain a largely stable position amidst the uncertainty surrounding a potential fractured political
mandate.

Potential Coalition Scenario: NDA Falls Short of Majority (<272 seats):

In the event of a scenario where the ruling party coalition, NDA, fails to secure a majority, the
probability is assessed to be medium to low. In such a situation where no single party achieves the
required mandate of 272 seats, the formation of a coalition government with other alliances
becomes likely. While the macro impact may remain relatively stable, there could be market
concerns regarding potential fiscal expansion. Equities may exhibit a downward bias, reflecting
investor apprehension about the political uncertainty. Concurrently, the fixed income market might
see a moderate increase in bond yields. Furthermore, the Indian Rupee (INR) could experience a
moderate depreciation amidst the anticipation of a mixed coalition government.

Election Outcome and Market Sentiment:

India is gearing up for the final verdict of the Union Election 2024, with the results expected to
significantly impact various sectors and the overall market sentiment. Over the past six months, the
Indian equity market has experienced considerable volatility, with the index fluctuating between
21,800 and 23,200 before settling near 22,600. This election-focused rally has seen a substantial
outperformance of stocks associated with sectors where the current government has demonstrated
a strong policy focus and favorable conditions. These stocks, primarily from capex and infrastructure-
linked sectors, have benefited from the government's policies, with public sector undertakings (PSUs)
being significant beneficiaries.

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Economic Strength and BJP's Favorable Position

The strength of India's economy is a crucial factor in the BJP's favorable position in the polls. When
Narendra Modi became prime minister in 2014, India was the tenth-largest economy in the world.
Today, it has ascended to the fifth position. This robust economic performance has bolstered investor
confidence and contributed to the outperformance of stocks associated with sectors where the
current government has shown proactive policy initiatives and conducive regulatory environments.
The markets are expected to react sharply to the exit poll results on June 1, 2024, and the final
results on June 4, 2024, which could lead to short-term volatility and profit booking.

Continuity in Reforms and Sectoral Opportunities

The potential re-election of the NDA is anticipated to further boost initiatives like "Make in India,"
providing significant opportunities for sectors such as railways, defense, shipbuilding, renewable
energy, and space. A common expectation among brokerages is the continuity of reforms post-
election, which could lead to a market rally followed by short-term profit booking. Once the election
fever subsides, other domestic factors such as market valuations, the government's 100-day agenda,
and the full budget announcement later in 2024 will take center stage. Additionally, global factors
like oil prices, geopolitical developments, and interest rate policies of global central banks will
influence market trends. It's worth noting that following the election results, there can be market
volatility on either side for up to one week, but after that period, the market is expected to resume
its journey. Moreover, with elections scheduled in 45 countries worldwide this year, the global trend
in electoral outcomes will also have an impact on market sentiment and trends.

Trade Agreements and Economic Partnerships

A significant milestone in India's trade strategy is the signing of the Trade and Economic Partnership
Agreement (TEPA) with the European Free Trade Association (EFTA) countries on March 10, 2024.
This agreement, which includes Switzerland, Iceland, Norway, and Liechtenstein, aims to promote
free trade and economic integration. Commerce and Industry Minister Shri Piyush Goyal highlighted
that TEPA marks India's first Free Trade Agreement (FTA) with four developed nations in Europe. The
agreement includes a binding commitment of $100 billion in investment and the creation of 1 million
direct jobs over the next 15 years, enhancing India's access to large European and global markets.

Strategic Initiatives and Future Prospects

India's economic strategy involves intensified efforts to grow its footprint in global value chains,
particularly in pharmaceuticals, medical devices, electric vehicles, green energy, and electronics. The
government is likely to refine its production-linked incentives based on past experiences and
continue its trade push, with a free trade agreement with Oman reportedly awaiting signature post-
elections. Ongoing negotiations with the United Kingdom, the Gulf Cooperation Council, and the
European Union are also at various stages of progress.

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Infrastructure and Energy Transition

The Modi administration's focus on infrastructure and energy transition remains strong, with
significant budgetary allocations toward expanding and modernizing highways, railways, airports,
and ports under initiatives like Gati Shakti and the National Logistics Policy. The development of
digital public infrastructure (DPI) based on the India Stack has significantly increased financial
inclusion, and future priorities may include enhancing access to credit for individuals and small
businesses. The energy sector will continue to prioritize green energy sources, including solar power,
hydrogen, ammonia, methanol, batteries, and electric vehicles, with nuclear energy, particularly
small modular reactors, emerging as a new area of focus.

Challenges and Global Economic Headwinds

Despite the positive outlook, the administration will face challenges both abroad and at home.
Global economic headwinds, such as the industrial policies of the United States and Europe, could
impact India's manufacturing growth by limiting foreign direct investment and exports. Nevertheless,
India's economic trajectory is set to position it as the third-largest economy in the world in the
coming years. The country's MSCI weight has more than doubled from 8% five years ago to 17%
recently, reflecting its growing importance in the global economic landscape.

Conclusion: A Transformative Period Ahead

In summary, the 2024 elections and subsequent policy directions will play a crucial role in shaping
India's economic landscape. Investors and market participants should closely monitor the election
outcomes and policy developments to identify emerging opportunities and risks. The anticipated
continuity in reforms and strategic initiatives under a potential Modi 3.0 administration suggests a
transformative period ahead for India and the world. The country's commitment to expanding its
global trade footprint, modernizing infrastructure, and transitioning to green energy positions it well
for sustained economic growth and development. Sectors poised for growth will align with
government policy focus and conducive business environments.

These sectors include:

1. Defense
2. Shipbuilding
3. Railways
4. Spacetech
5. EDM (Electronic Design & Manufacturing)
6. Renewable Energy

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