Bernstein Report: As NDA eyes '400 paar', road to deliverance of promises may be fraught with challenges

New Delhi: While the country is eyeing a change of guard at the Centre, with the first phase of polling already done to elect the 18th Lok Sabha, the optimism surrounding the incumbent government's performance has set the stage for high expectations, but a closer look at ground realities suggests that the path to achieving these expectations may not be without its challenges.
The Bernstein Societe General Group's latest India Strategy report delves into the intricacies of the political landscape, analysing various factors that could influence market sentiments and economic policies in the coming years.
At the beginning of the year, India witnessed record-high valuations, especially in the small and mid-cap sectors.
Although there was some stabilisation in valuations during January, February, and March, this month has seen a resurgence; with small caps rising by 4 per cent and mid-caps by 2 per cent.
A pre-election euphoria is now building up, with expectations of continuity in power further strengthened by the possibility of the ruling party coalition winning over 400 seats.
The report suggests that the optimistic scenario, where the incumbent government secures a landslide victory, has become the new base case.
With projections ranging from 330 to 400 seats for the ruling coalition, there seems to be a consensus among opinion polls that the National Democratic Alliance (NDA) could secure a substantial majority.
Some polls even go as far as predicting a staggering 411 seats for the NDA.
However, amidst the electoral fervor, the report highlights several challenges that could impede the government's ambitious targets.
Various states across the country are grappling with socio-political unrest, including agitation from different communities in Gujarat and Rajasthan, farmer protests in Punjab and Haryana, and political upheaval in Delhi.
Moreover, the report points out that in the 2019 elections, the NDA secured an overwhelming majority in key states, leaving little room for further gains.
With almost 99 per cent of seats captured in eight crucial states, including Gujarat, Rajasthan, and Bihar, the road to expanding this stronghold to reach the coveted "Plan 400" target may prove to be more challenging than anticipated.
The report questions where the additional 50 seats, required to surpass the previous election's tally, will come from. While the southern belt, particularly Andhra Pradesh, Telangana, and Odisha, presents an opportunity for growth, the report emphasizes that securing gains in these regions will not be a cakewalk.
Despite the optimistic projections, the report suggests that the markets may not see a significant increase in seats from low-penetration states, offsetting potential losses in other regions.
While a short-term positive reaction is expected if the election results align with current estimates, a profit-booking phase post-elections is anticipated.
Nevertheless, the macroeconomic fundamentals remain strong, and the report predicts modest downsides in the market.
The report underscores that market expectations have reached a peak, with opinion polls projecting a resounding victory for the ruling coalition.
However, it questions whether the polls are being too optimistic and highlights potential challenges in achieving the projected gains.
A scenario where the ruling party secures around 300 seats (approximately 350 for NDA) could trigger a correction in the markets, which have factored in a number closer to 400.
While continuity of power is expected, a below-consensus result may lead to a market reaction, signaling the end of the current frenzy.
In the past decade, the current government has demonstrated greater fiscal responsibility in managing major subsidies, with an average annual growth rate of only 4.6 per cent, despite facing challenges such as the Covid pandemic.
This contrasts sharply with the previous administration, which saw an annualized growth rate of 21 per cent.
The savings generated from this prudent approach appear to have been redirected towards increased capital expenditure, which has nearly doubled compared to the period from 2004 to 2014.
Initiatives such as the creation of more government job opportunities are expected to place the burden of employment on the government rather than the private sector, leading to higher revenue expenses.
Additionally, a greater allocation of funds towards subsidies could steer India away from its path towards fiscal consolidation, a trend observed whenever the country nears its 3 per cent deficit target.
Previous instances include the Global Financial Crisis (GFC) and the COVID pandemic, both of which resulted in spikes in the deficit, temporarily breaching the 3 per cent threshold.
If the projected 15 per cent growth over the budgeted FY25 value is realized, the fiscal deficit for FY26 would increase to 5.1 per cent from the current 4.5 per cent.
Although it is unlikely that the government would make drastic changes to its subsidy policy, such a move remains a significant policy risk.
While strong economic cycles are expected to continue, a shift towards populist measures could potentially shorten their duration.
Looking beyond the elections, the report predicts continuity in government policies in the medium to longer term. The focus on manufacturing and capital expenditure is expected to persist, albeit with challenges such as a potential return to populist measures.