General elections 2024: A weaker mandate to impel policy reset

We might also see push & pull dynamics within the BJP. The imperatives of the coalition will preclude BJP’s ability to push through radical policies. Thus, making their policy inclination more towards executives rather than legislative policies. Also, with the upcoming major state in Maharashtra and Uttar Pradesh, challenges for BJP will intensify.

to have gained center stage: The underwhelming results for the BJP-led NDA government reflect the dominant role of the economic and livelihood issues faced by the voters in this election. Burgeoning household distress is reflected in the maximum vote share erosion of the BJP in the election results; the allurement of extended free-food distribution is not holding anymore as the need for productive employment is becoming a dominant necessity. Hence, in the forthcoming policies, livelihood issues of the Indian households will gain centrestage.

Changes in the policy landscape: Over the past 5-7 years, the government initiatives were aligned more with the supply side policies like corporate tax cuts, recapitalization of banks, resolution of bad loans, and significant step-up towards infra spending, all with the hope of reviving private capex. The concomitant focus on has implied rising tax incidence on the household to a multi-decade high alongside the reduction in subsidies, even while real household income growth had decelerated to a 40-year low.

Now, with the dawning of the reality of a , we can expect a significant policy facelift encompassing a shift from an overly supply-side policy framework toward a broader demand revival. The government’s focus is likely to shift towards addressing the population at the lower end of the pyramid, thereby rebalancing the widening K-shaped consumption pattern that is currently prevailing.

In the context of renewed global , domestic populism would also solidify inward-looking trade policies to protect local industries, with the view to generate productive employment.

These possibilities would push the government towards:

• Refocus towards the revival of the with higher allocations towards income support and employment generation outside of MNREGA.
• Fiscal measures to address the cost-of-living issues by reducing the multi-decadal high tax incidence on the households. This could involve reducing the GST rates and/or increasing income tax slabs
• Reduction of tax on fuel thereby reducing prices of LPG, diesel, and petrol
• With the increased dominance of the local state parties in the coalition government, their bargaining power will increase in negotiating their deserving share from the gross tax collection.
• The political imperatives of the above policies would potentially impact the ongoing fiscal prudence path and will force counterbalancing measures like:

• Accelerated pace of asset monetization, like divestments and excessive reliance on the balance sheets of PSU companies.
• Potential revenue loss from lowering GST rates can be rebalanced by reducing corporate tax exemptions or increasing the tax on the rich.
• Rebalancing the spending profile by lowering the pace of capital outlay.

Potential of the changed political economy:

The changing political backdrop and policy facelift will drive the imperative of portfolio rebalancing. Over the past 5 years, the GoI has expended significantly towards infra development, particularly roads, railways, and defense. Looking ahead, the government will reduce the pace of expenditure in these sectors, particularly roads and railways, and accelerate allocations towards rural and households or in the employment-generating sectors, including an increased focus on small-scale industries. This would help in reviving the household consumption and demand situation. Given the geopolitical considerations, spending on the defense sector is less likely to be compromised.

Intensify trade protectionism or incentives to boost :

• Potential loss of domestic spending and job creation potential to renewed Chinese dumping into India as a fallout of renewed US-China trade conflicts. The US has imposed punitive tariffs on segments such as batteries, EVs, steel & aluminum products, medical products, semiconductors, lithium, and non-electrical vehicle batteries. GoI can also increase anti-dumping tariffs in these segments.
• Separately, Chinese dumping through bilateral trade can increase in segments like chemicals, Engineering goods, electronic goods, and non-electrical. India’s trade deficit with in these segments is already widening. So, MIP or tariff measures can also be expected in these segments.
• Also, the government can increase its focus on boosting sectors such as apparel, motor vehicle parts semiconductors, etc, where lies the potential to increase its exports to the US.
• The government can enhance its sector coverage under PLI from the current list of 14 sectors.

Invigorate service sector employment opportunities:

• Energy sector: PM Surya Ghar Muft Bijli Yojna where solar panels are installed in houses. At the household level, this will save power cost, generate income, and create associated employment.

• Tourism: Need for a comprehensive tourism sector reform in coordination with the states. This is expected to boost employment and income at a broad-based level.

Based on our value vs growth framework, in the current situation, we believe the value stocks will perform better than the growth stocks. Thus, aligning more towards large-cap stocks would be preferable to small and mid-cap stocks. The post-election market correction has extended a window of opportunity to rebalance the portfolio. The Consumer space and IT sector may regain investor interest. Higher fiscal commitment can keep Gsec yield on the higher side, thus impacting rate-sensitive sectors; banks and NBFCs continue to see margin pressure to the elevated cost of funds. Refocusing on the rural economy can benefit agri-sector companies and rural autos. Rising dependence on the resources of PSU companies to fund fiscal expansion could make PSU stocks vulnerable. Reduced infra spending could make companies dependent on it susceptible to derating as a policy shift could have a medium-term impact.

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