The Lok Sabha 2024 elections are approaching their conclusion, with only two out of the seven phases remaining. Amid this backdrop, the markets have been volatile, with the S&P BSE Sensex and the Nifty50 struggling to maintain higher levels. While most analysts predict that the current National Democratic Alliance (NDA) government, led by the Bhartiya Janata Party’s Narendra Modi, will secure a third consecutive term as prime minister, they also believe that achieving the party’s target of over 400 seats in the ongoing elections may be a challenging feat.
Different outcomes in stock market
| Scenario | Election Outcome | Infrastructure/Capex | Consumption | Manufacturing | Inflation | Fiscal Discipline | Market Implication |
| Case 1 | BJP >290 seats, NDA>340 seats | Infrastructure and capex projects like bullet trains, highways, or waterways could be announced | Gradual recovery in rural consumption | Continued focus on manufacturing, with funds diverted from subsidies | Seasonal food item variation to stay in RBI’s comfort range | Comfortable road towards 4.5% fiscal deficit by FY26 | Immediate market rally followed by short-term profit booking. Nifty is expected to deliver high single-digit or low double-digit returns this year. |
| Case 2 | BJP 260-290 seats, NDA 290-340 Seats | Infrastructure and capex projects to continue, with a gradual shift towards private sector capex | Gradual recovery in rural consumption | Continued focus on manufacturing, with funds diverted from subsidies | Seasonal food item variation to stay in RBI’s comfort range | Likely reduction of fiscal deficit to 4.5% by FY26 | No major impact on current plans. Possible reduction in fiscal deficit to 4.5% by FY26 |
| Case 3 | BJP 240-260 seats, NDA 270-290 Seats | Reduced infrastructure spend, with some non-critical projects shelved | Gradual recovery in rural consumption, with some incentives announced | More focus on MSMEs in manufacturing, with possible impact on FDIs | Inflation to stay in RBI’s comfort range | Fiscal path to become longer, impacting INR | Mild profit booking near term. The market is expected to deliver high single-digit returns this year. |
| Case 4 | BJP < 240 seats, NDA < 270 seats | Drastic effects on infrastructure spending, with funds diverted to social initiatives | Pickup in rural consumption, with emphasis on UBI schemes and employment | More focus on MSMEs in manufacturing, with possible impact on FDIs | Inflation likely to exceed 6% in the near term | Significant increase in fiscal deficit, likely beyond 5.2% | Heavy profit booking near term. The markets are projected to yield low or negligible returns this year. |
In the worst-case scenario where the NDA fails to secure a majority with fewer than 272 seats, Short-term business sentiment will decline, Foreign direct investment will also decrease. In this scenario, Bernstein anticipates significant government spending on salaries, higher MGNREGA wages, and a sharp rise in the fiscal deficit, potentially exceeding 5.2 percent for both the current and next fiscal year.
What different outcomes means in Stock market and Economy
There will be drastic near-term effects on infrastructure as funds are diverted to social initiatives. The private sector will be encouraged to take on infrastructure projects, resulting in only the most viable ones progressing while others are shelved. Additionally, the distribution of 10 kg of free food will deplete stocks, and increases in universal basic income (UBI) and MGNREGA wages will boost demand for other goods, likely pushing inflation beyond 6 percent in the near term.
Wealthy investors are exhibiting different investing behaviours based on their risk appetite. While some are holding off, many are willing to invest in the equity markets. They’re not only interested in traditional investments but also in innovative ideas within both listed and unlisted spaces.
How should investors approach the ‘election theme’? Is a stock market correction expected before the poll results?
Election outcomes often generate increased volatility and uncertainty in the market. While short-term fluctuations are possible, the long-term impact of elections on market performance is typically minimal. Instead of attempting to time the market based on election results, investors should concentrate on their long-term investment goals and maintain a diversified portfolio. A well-diversified portfolio and a long-term investment horizon are the best strategies for navigating election-related volatility and achieving financial objectives.