Political stability would likely lead to policy continuity, which could bode well for market sentiment, UBS said in a note.

The elections could result in three likely scenarios – BJP single-party majority; BJP-led coalition or a weak coalition led by INDIA alliance. The first two outcomes are largely priced in by the market. In the third scenario, the markets could have worries about fiscal discipline, less decisive government leading to lags in implementing supply side reforms, the brokerage said.

A potential third term for Modi could further help digitisation and policy push towards manufacturing/exports, given India’s increasing footprint in global value chains.

“The focus would be on policy continuity, which could bode well for business sentiment and the much anticipated private corporate capex recovery. In addition, further progress in supply-side reforms could be seen, including the clean energy transition, higher infrastructure spending (both digital and physical), a manufacturing push and other targeted policy initiatives,” UBS said.

In the second scenario, reform momentum remains broadly similar, but some tough policies such as disinvestment, a land bill and a uniform civil code may not progress and/or are likely to be put on hold. However, comfort about fiscal discipline could be less of a concern for investors in this scenario.

In the third scenario, the economic policy approach would be largely aligned, but markets could have concerns about fiscal discipline and a less decisive government, leading to lags in implementing supply-side reforms. There could also be a delay in the private corporate capex recovery due to weaker business confidence caused by the surprise political outcome.

Bharat-focused policies

Over the past year, the recovery in rural demand has been mixed owing to weather-related uncertainty, tepid rural wage growth and the government’s supply-side measures to contain inflation. The Modi government did not announce any substantial pro-rural populist schemes in the run up to the 2024 elections. The expenditure on rural-focused schemes (including drinking water, employment support, housing and rural roads), however, has grown at 16 per cent CAGR over FY19-24.

Women-centric polices have taken centrestage especially since 2023. “The growing inclination of political parties to offer targeted welfare benefits to women is closely linked to the rising percentage of women participating in the electoral process over the years,” UBS said.