Story of the month
Indian stocks have taken a significant hit, falling 8.5% as June 4th election result was not as decisive as early exit polls had predicted. What is actually at stake in India right now?
MACRO UPDATE
The world’s most populous nation since 2022 with 1.442bn inhabitants in June 2024 (+0.92% yoy), India is a domestic-demand oriented emerging economy with 60% of its GDP coming from private consumption. The first revised estimates of India’s real GDP for 2023 stands at 1.93tn$, +7% yoy. More interestingly, India’s current account deficit (CAD, a measure of a country’s income and expenses abroad) has narrowed to 0.8% in the 2019-2023 period (vs. 1.4% in the previous 5-year period, 3.5% before). Driven by 1) a lower goods deficit due to a reduction in manufactured imports, especially machinery. but also a declining deficit in fuels & gold, and 2) a higher services export surplus, especially in key IT functions.
While India’s economy is still smaller than China’s, it would be poised for higher growth as 1) it relies on a younger and growing demographic and 2) its post- pandemic positioning as “factory of the world”, with prime minister Narendra Modi’s “Make in India” policy since 2014 is increasingly gaining traction with international companies.
India’s moderate core inflation forecast (3.2% vs. >6% in 2023) supports a lower wage inflation outlook, allowing analysts to forecast a real interest rate configuration below 1% for 2025 (through a base case scenario assuming a 25bps cut in Q4 2024, followed by 50bps in 2025).
EXPOSURE TO EXOGENOUS FACTORS
As a fast-growing emerging market, India continues to be partly driven by exogenous factors. It accounts for 18% of the global population, but only has 4% of its freshwater resources. Thus, it is heavily dependent on seasonal rainfall through the monsoon season, with the southwest one accounting for 80% of total annual rainfall. The increases in food price volatility seen in 2023, due to delayed onset of the monsoon (to June), highlights this potential for exogenous disruption to the national economy.
India’s agriculture accounts for 90% of national water withdrawal and industry at 2% (FAO, 2020), of which 87% is for the thermal power sector. Power demand typically increases during heatwaves as they imply large scale additional cooling demand (peaked in May 23 at 240GW), putting significant pressure on power generation, potentially resulting in loss-making shortages. With pre-monsoon heatwaves tending to be more frequent and followed by uneven rainfall, these issues are now increasingly material for India.
On top of these factors, India is also affected by financial factors. As an emerging market, India is poised to increasingly attract foreign direct investment (FDI), as long as its geopolitical framework provides a stable outlook and measurable risk-reward. As such, India’s stock market (NIFTY 50, BSE SENSEX) has historically been highly correlated to the US one (notably the S&P 500), which was less pronounced with European stocks. On top of that, analysts usually assume a 50bps sensitivity (or “beta”) of India’s growth to global growth, meaning that for every 1pp downgrade to global growth, India’s growth could be 50bps lower.
Election years have historically been good for the Indian equity market. So, what justifies the sharp market decline observed across India’s indices after the latest election results were released?
LOK SABHA RESULTS: ATTRACTIVENESS AHEAD ?
On June 4th, the final results of India’s “Lok Sabha” elections, the lower house of its bicameral parliament (the upper house is called “Rajya Sabha”) were announced. The world’s largest democratic exercise consists of a seven-phase adult universal suffrage, started on April 19th to elect 543 members for a 5- year term. Both early opinion polls and preliminary exit polls showed a strong majority of seats for the National Democratic Alliance (NDA), a coalition led by Prime Minister Narendra Modi from Bharatiya Janata Party (BJP), literally “Indian People’s Party”, the ruling right-wing Hindu party.
