What significance would the Indian election result have for international investment and policies?

As Indian Prime Minister Narendra Modi and his ruling Bharatiya Janata Party (BJP) are widely expected to return to power for a third term, analysts say this will be a positive for relations with the UAE, which have strengthened under the current government.

However, politics and elections are always rife with unpredictability and uncertainty, and other possible scenarios may pose challenges to India’s international investment relations in the near future, they warned.

“If the incumbent government wins a majority, we can expect that these relations will only strengthen and similar initiatives will lead to mutually beneficial policies,” says Kush Gupta, director of SKG Investments & Advisory.

“I think that in an unfavorable scenario of political instability, relations will remain strong. However, due to the change in government, we may have seen a pause in what would otherwise have been an accelerated event.”

India and the United Arab Emirates share close ties, which have strengthened in recent years with the signing of the Comprehensive Economic Partnership Agreement in 2022. border transactions.

In February, Modi visited the United Arab Emirates for the third time in eight months, resulting in closer ties in areas such as digital infrastructure and ports.

India is the second largest trading partner of the United Arab Emirates, while the Emirates is the third largest trading partner of this Asian country. Therefore, the outcome of the India polls could have implications for relations between the two countries, as well as for India’s broader international investment environment.

“The upcoming elections in India will have a significant impact on India’s international investment policy and relations with the UAE and the Gulf region,” says Saket Gaurav, chairman and managing director of Indian consumer electronics brand Elista.

“If the BJP-led NDA (National Democratic Alliance) coalition secured victory, it would likely mean stability and continuity in India’s approach to international investment, especially in key sectors such as energy, real estate and technology.

“Conversely, if there is an unexpected outcome and (opposition) INDIA (Indian National Alliance for Inclusive Development) emerges victorious, it could herald a period of change and adjustment in India-UAE relations.”

The results of India’s weeks-long election are expected to be announced on Tuesday, when votes are counted.

In the last elections in 2019, the BJP and its NDA allies won 352 of the 543 seats in the lower house of the Indian Parliament, with the BJP alone winning 303 seats. To win a majority, the party must win 272 seats.

The BJP said it and its allies would win 400 seats in this election, but lower voter turnout and apathy have made political experts skeptical that the ruling party will be able to ensure that number is reached – although the consensus is that it will. able to continue to emerge victorious.

“If the ruling party returns to power, it will mean continuity of politics,” says Mohit Khanna, co-fund manager at Purnartha One Strategy.

“This will mean minimal or no change for companies investing in or outside India when it comes to investment policy or government relations.”

Khanna believes that even if the BJP wins fewer seats, it is unlikely to have a significant impact on its policy towards the region.

“I don’t expect any major policy changes if the current government returns to power or even loses its majority,” says Khanna.

“India’s trade policy with the UAE or the Gulf region is much stronger and more mature.”

But Amit Goel, co-founder and chief global strategist of Pace 360, says the BJP will need to maintain a strong single-party majority in the alliance for investors to “remain confident in policy continuity.”

“Foreign policy includes expanding India’s global diplomatic reach and engagement with India’s Middle East Economic Corridor,” says Goel.

“India aims to become a leading manufacturer in Asia as companies diversify their supply chains beyond China.”

However, if the BJP-NDA emerges victorious but the ruling section fails to obtain an absolute majority, it could “create an uncertain environment in terms of government policy and foreign relations,” he says.

Gupta says that “without a clear majority, the BJP will struggle to adopt reforms and policies with the same energy it is accustomed to.”

“Bigger moves will be difficult to make and, most importantly, investor confidence will suffer. In such cases, we may see funds flow out of equities and into defensive assets such as gold, bonds and real estate.”

He said this would likely lead to a correction in Indian stock markets and a depreciation of the Indian rupee, while a clear majority result for the BJP would push markets higher and provide support to the Indian currency.

He warns, however, that the stock exchanges have largely already priced in this result.

Globally, analysts like Gupta say India is increasing its importance in the international investment landscape, reflected in developments such as the Morgan Stanley Capital International (MSCI) Emerging Markets Index increasing India’s weighting in February.

“If the BJP-NDA comes to power with a large majority, we could see this trend continue,” says Gupta.

“A reformist government that has a majority to pass laws is a key factor in India’s recent rise as a global investment destination. Once in power, policies to ensure ease of doing business in the country will be a priority and we can expect a large inflow of funds across sectors.

However, if an opposition coalition government led by the Indian National Congress came to power, it could surprise everyone, including investors.

“In the surprising event that the NDA does not come to power, we can expect a shock-and-continue scenario where foreign investors will stop, wait and watch future developments,” says Gupta.

This would have a negative impact on the Indian markets.

However, he adds that in the medium and long term, India should – at least in theory – have similar economic potential.

“India’s key growth drivers, including favorable demographics and consumption, will remain unchanged.”

However, according to Goel, a change of government would have far-reaching effects.

“If the opposition alliance unexpectedly wins a majority, it is likely to bring significant changes in policy and governance and could create significant uncertainty in the market due to potential reversal of policies and reforms implemented by the NDA,” says Goel.

“This would likely trigger a sharp, unfavorable market reaction.”

Analysts believe that for non-resident Indians in the Gulf region, the best possible solution would be the continuity that the return of the current administration would provide.

“If the BJP secures victory, it could significantly impact NRI investments,” says Goel.

“Market sentiment and confidence are likely to improve, leading to an increase in foreign investment, which domestic research investments may find beneficial due to the stability associated with a strong government and its potential for long-term economic reforms.”

Updated: June 1, 2024, 3:00