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  • Writer's pictureTharindu Ameresekere

India's Stock Market Drops After Modi's Party Loses Majority

India’s stock market suffered its worst decline in four years after Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) lost its parliamentary majority. This unexpected election outcome means Modi will need to rely on smaller parties to form a governing majority in the 543-member Lok Sabha, raising uncertainty about his ability to pursue his pro-business policies.

Credit: Still Pixels India

Market Reaction

The NSE Nifty 50 and BSE Sensex indexes closed down 5.93 percent and 5.74 percent, respectively, on Tuesday, after initially falling by as much as 8.5 percent. Indian stocks saw further losses on Wednesday morning before recovering in the afternoon, with both indexes up more than 1.5 percent.

Investor Concerns

Investors have supported Modi’s economic policies, which include infrastructure investment, boosting domestic manufacturing, attracting foreign investment, reducing red tape, and combating corruption. Under his leadership, the Nifty 50 index has nearly tripled in value. Earlier this year, India’s stock market capitalization surpassed $4.3 trillion, making it the world’s fourth-largest market.

Before Tuesday’s surprising election result, Indian stocks had surged to record highs based on exit polls predicting a BJP-led National Democratic Alliance (NDA) landslide. Modi has overseen strong economic growth, with GDP growing by 8.2 percent in the fiscal year ending in April. Over the past decade, GDP per capita has risen from about $5,000 to more than $7,500, and India has become the fifth-largest economy globally.

Future Uncertainty

Modi’s need to negotiate with smaller coalition partners raises the possibility of compromises on his economic agenda. Economist Garima Kapoor of Elara Capital noted that a larger BJP majority would have signaled more reforms and less need for populist measures. The markets are now reassessing this shift, causing sharp corrections in public sector and capital expenditure-led stocks.

Credit: Sohel Patel

Despite the election outcome, many of India’s economic strengths remain unchanged. India will continue to benefit from its large, young population and its non-alignment policy, which keeps it away from geopolitical tensions. Gary Tan of Allspring Global Investments stated that the election outcome would not significantly affect India’s long-term market outlook, driven by favorable demographics and geopolitical dynamics.

Economic Challenges

Despite impressive GDP growth, India faces challenges like widespread poverty, growing inequality, and corruption. A significant issue is the shortage of quality jobs for its vast population. The International Labour Organization has warned of a mismatch between the aspirations of India’s educated youth and available jobs. Additionally, India’s growing household debt is a concern, with the Reserve Bank of India working to control this risk, potentially slowing credit growth in the short term.

The future of India’s stock market and economic policies will depend on how effectively Modi’s coalition navigates these challenges while maintaining investor confidence and driving economic growth.

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