In its report from May 21, Bernstein highlighted the significant impact a BJP-led NDA victory in the 2024 Lok Sabha elections could have on India’s economic growth. According to Bernstein, such an outcome would ensure political stability and enable India to accelerate its economic growth to match its major Asian counterparts. The report strongly advocated for a third term for Narendra Modi, emphasizing the importance of “Modi 3.0” for India to effectively leverage its structural growth drivers.

Bernstein’s analysis pointed out the critical role of policy continuity at the Centre for India’s economic sustainability and growth. The firm outlined how transitioning from a reform-oriented approach to focusing on execution is essential for India, with critical areas such as infrastructure development, manufacturing scale-up, export sector enhancement, employment opportunities, and inflation management pivotal for progress.

Moreover, Bernstein delved into four possible outcomes of the Lok Sabha elections and their potential impacts on the economy and markets:

  1. A scenario where the BJP secures over 290 seats and the NDA over 340 could lead to an immediate market rally and subsequent short-term profit booking, with the Nifty expected to see high single-digit or low double-digit returns for the year. This outcome would likely see continued infrastructural and capital expenditure growth, with inflation remaining within the RBI’s target range of 2-6%.
  2. If the BJP wins 260-290 seats and the NDA 290-340 seats, slight profit booking might occur in the short term, with the Nifty likely delivering high single-digit returns. This scenario might slow capital expenditure, but inflation will stay within the RBI’s comfort zone.
  3. A result where the BJP garners 240-260 seats and the NDA 270-290 seats could lead to moderate to heavy short-term profit booking, with the Nifty still expected to achieve high single-digit returns for the year. Infrastructure spending might decrease, with a possible shift towards freebies and tax breaks, though these are not anticipated to affect inflation significantly.
  4. When the BJP gets less than 240 seats, and the NDA falls short of the majority with less than 270 seats, substantial short-term profit booking might occur, with minimal to no market returns expected for the year. This could negatively impact infrastructure efforts in the short term and lead to declining business sentiment. Bernstein warned of potential inflation spikes beyond 6% and a fiscal deficit increase beyond 5.2% due to higher government spending.

The report also compared the Modi administration’s last decade with the UPA’s governance from 2004 to 2014, highlighting five significant differences:

  1. The Modi government’s pursuit of structural reforms across various sectors.
  2. A more efficient use of capital and a shift from populism to fiscal discipline, resulting in capex surging by six times.
  3. Improved inflation management despite various challenges.
  4. Creating new economic drivers, such as a significant push towards manufacturing and FDI, led to a tripling of electronics production.
  5. A focus on facilitating employment opportunities rather than merely increasing government jobs, thereby enhancing efficiency.