Indian Stocks Struggle to Make Sense of Election Surprise

The dust has settled on the Indian election, quite literally since the monsoon rains are now sweeping over the west coast of the country. The world’s largest democratic process has delivered its result.

Indian stocks have been on a wild ride. They skidded into the election on a downward slide. And they renewed their selloff when it became clear that incumbent Prime Minister Narendra Modi, a pro-business politician tainted by his flirtation with Hindu fundamentalism, would win a third term, but lose his party’s majority in parliament.

Modi will be hobbled, and have to lean on his coalition partnership to govern. But the Mumbai markets have rallied the last two days as he cobbles together a team.

For stocks, last year’s star performers in Asia have had a tough time in 2024. The Nifty 50 index is up 0.9% on Thursday, adding to Wednesday’s 2.6% advance. But it had fallen hard, 8.6% between Monday afternoon and mid-day Tuesday. The Sensex showed a similar pattern, up 0.9% today to add to Wednesday gains, reclaiming some of the 6.0% lost in two days of selling to start the week.

Although domestic investors are back in action, foreign institutions are still exercising caution. Foreign investors sold US$1.5 billion in Indian stocks on Tuesday and added to that with another US$678 million in selling on Wednesday, according to the National Stock Exchange. It is local mutual funds and banks who have been doing the buying.

Modi’s struggles shook the markets because exit polls and most pollsters expected a landslide win, and an enhanced majority. Those predictions missed far, far of the mark. Voters delivered a slap in the face, the loss of the party majority acting as a check on Modi’s power, and likely preventing him from pushing any particularly ambitious policies.

Democracy is messy at the best of times. It is particularly quarrelsome and patience-testing in a nation of 1.4 billion people. But the alternative is the kind of dictatorship we see in China and Russia. As wartime British prime minister Winston Churchill noted, “it has been said that democracy is the worst form of government, except for all those other forms that have been tried from time to time.”

Foreign investors will be scouring over Modi’s choice of ministers in his cabinet, particularly key posts such as his choice of finance chief. Modi will have to pay greater heed to his party’s partners and hand out a few top positions to keep them friendly.

Modi’s Bharatiya Janata Party (BJP) won just 240 seats in the 543-seat Lok Sabha, down from 303 the last time around, in 2019. It also won a single-party majority in 2014.

Now it is only thanks to coalition partners in the National Democratic Alliance that the BJP leads can it reach above the 272 mark needed for majority rule. But the BJP’s coalition partners have at least agreed on Wednesday to support Modi and maintain their alliance.

The opposition, led by Rahul Gandhi at the helm of the India National Congress, had a markedly better showing than in 2019, winning 243 seats for the coalition it leads, the Indian National Developmental Inclusive Alliance. In the last national election, it secured only 91.

All the uncertainty leaves Indian equities with little to show for their work in 2024, the Nifty up 5.1% year to date and the Sensex 3.9%. It is a far cry from recent years.

Indian stocks have been the leading Asian emerging market, essentially replacing the place that China took in portfolios prior to the pandemic. The Nifty 50 was up a stellar 19.4% in 2023, with the Sensex not far behind on an 18.7% advance.

I explained last week that there’s good reason behind the optimism. The Indian economy is firing ahead, posting the kind of outsize growth that China used to post. Fresh figures reported on Friday show that GDP grew 8.2% for the fiscal year through March.

It’s faster than economists expected. And outperformance looks set to continue, with the central bank forecasting that growth will run 7% in the year through March 2025. In fact, the growth is so strong that the Indian government expects the total economy to soon surpass both Germany and Japan. Within three years, it predicts, India will be the world’s third-largest economy, behind only the United States and China.

India is an important but inconsistent partner for the United States in Asia. It has the weakest U.S. allegiance among the Quad nations that also include Japan and Australia, and India must always dance a difficult jig with regional rival and trade partner China. It is also a partner of China in the BRICS coalition of emerging economies, which China and Russia have been pressing to expand.

Still, India generally seeks to offset China’s influence in Asia. Relations have been relatively frosty, as I explained at the time, since a clash between troops from the two sides killed 20 Indian soldiers and an unknown number of Chinese troops high in the Himalayas in June 2020. That came after prior tussles along their mountain borders and on the edges of the nation of Bhutan, sandwiched between the two giants.

Modi hasn’t won any new friends in Beijing with his

, in response to congratulations on his reelection from new Taiwanese President Lai Ching-te, that “I look forward to closer ties as we work towards mutually beneficial economic and technological partnership.”

Modi should be sworn in on Saturday, alongside his ministers. He and his cabinet resigned after the election results, as is normal practice. His rival Gandhi has called the election a “moral loss” for Modi, who had explicitly criticized Muslims as “infiltrators” who have more children, comments his backers fell over themselves to explain away.

Modi, meanwhile, saluted a crowd chanting Hindu nationalist slogans. “This is the first time a government has come back for the third time,” he said in his victory speech. Now we will see what, if anything, it can get done.