Indian Prime Minister Narendra Modi's election shortfall leaves Wall Street scrambling

Indian Prime Minister Narendra Modi gestures, at the Bharatiya Janata Party (BJP) headquarters in New Delhi, India, June 4, 2024. 

Adnan Abidi | Reuters

A stunning political setback for Indian Prime Minister Narendra Modi has business executives in the country furiously making calls, trying to better understand the impact on India’s economy and investment landscape following Modi’s failure to secure a supermajority for his party.

“Indian voters are great teachers. They have certainly surprised the politicians, exit pollsters and market watchers,” wrote Venugopal Garre, managing director at AB Bernstein, to clients in an email.

Over the past several years, chief executives from some of the biggest companies in the United States have invested time and money into relationships with Modi, as they set their sights on the Indian market.

GE Aerospace, Apple, Starbucks and Nvidia are among the companies that have made high-profile deals to expand, manufacture and sell their products inside the country.

“As China slows down, India has been the go-to destination for U.S. tech juggernauts,” Pramit Chaudhuri, head of Eurasia’s South Asia practice, said Tuesday to CNBC.

The Indian stocks market sold off on Monday following the surprising election results – staging its biggest plunge since 2021. 

India stocks fall following narrow Modi election victory

The outcome is “a clear negative that is likely to create an overhang on the market over the near term,” said Rahul Sharma, an emerging markets portfolio manager at Shafer Cullen, an investment firm with $6 billion in assets under management.

Sharma is still a long-term bull on India, however, citing the country’s strong demographic profile.

“Don’t forget about the massive potential of the country with per capita income still at such a low level and huge advantages such as their large, young, relatively educated workforce,” said Sharma.

Modi’s economic agenda 

Modi’s failure to secure a supermajority for his party also raises new questions about the Modi government’s broader economic agenda. 

Specifically, whether its promised reforms will be passed in a swift manner, as Modi pledged to do while he was campaigning.

“Coalition governments always run into trouble, especially when devising economic plans,” wrote Asia Society’s India team in a note to clients.

“Most economic reforms will require the Indian leader to persuade…negotiate…work with parties across the aisle which could elongate the timeline in getting things done,” said a former government official to CNBC who was granted anonymity in order to discuss private conversations.

The question is whether Modi can pivot from governing as the leader of a supermajority, to governing as a consensus builder.

Modi’s goal is to make India the third largest economy in the world by 2027. It is currently the world’s fifth largest economy and grew by 8.2% in the fiscal year ending in March.

But India’a eye-popping GDP last year conceals a high unemployment rate which is crippling the career prospects of younger workers and driving millions out of cities and back to rural communities.

“The country’s jobless situation certainly contributed to a tighter election,” said Chaudhuri, of Eurasia.

A “lack of jobs is voters’ biggest worry as [the] labor market recovery is not yet broad-based,” TS Lombard analysts wrote in a note to clients on Tuesday. 

Now, one of the labor laws that Modi’s government had intended to reform may not get implemented, because Modi’s party, the Bharatiya Janata Party, or BJP, no longer holds an outright majority in Parliament.

Modi's economic agenda could be disrupted after smaller-than-expected mandate in India election

Modi’s proposed reforms would have simplified laws around hiring and firing workers and removed other barriers to a more flexible labor market.

Other analysts say key reforms tied to agriculture and land acquisition may also take more time to enact than was previously expected. Infrastructure projects should continue, but like other sectors, potentially at a slower pace.

American investment

In the short term, the new governing dynamics in India’s Parliament could potentially require a reset of corporate expectations in the United States. Some reforms may take more time under a coalition government. 

But experts say U.S. companies still see India as a central part of their longer-term strategies to diversify manufacturing and supply chains beyond merely relying on China.

Read more CNBC politics coverage

“I don’t think the U.S. corporate expansion into India should be affected [by the election results], said Raghuram Rajan, the former governor of the Reserve Bank of India.

He added that American investment had never been “coming in because of reforms, that would affect that investment.” Rajan is currently a professor of finance at the University of Chicago’s Booth School of Business.

Easing social tensions

Sharma, of Shafer Cullen, predicted that BJP’s “aggressive Hindu nationalist” rhetoric will soften post-election, “which will reduce divisiveness and tension in the country.”  

The Indian leader has faced criticism over his treatment of minorities, including Sikhs and Muslims, and his government’s efforts to silence political opposition. 

Supporters of the ruling Bharatiya Janta Party (BJP) holding cut-outs of India’s Prime Minister a Narendra Modi during an election campaign rally in Amritsar on May 30, 2024. 

Narinder Nanu | Afp | Getty Images

The election results “could leave India in a more secure place socially if it dissuades the BJP from pursuing hardline Hindu nationalist policies,” Tom Miller, an analyst at Gavekal Research, wrote Wednesday.

Once the new government is formed, the next big event will be the release of the annual budget on July 1, said Jitania Kandhari, head of macroeconomic research on Morgan Stanley’s emerging market equity team. 

“This will set the tone and reaction of the new government (in terms of spending priorities),” Kandhari wrote in email to CNBC.

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