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Navigate India's Post-Election Economic Landscape With ETFs

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After the unanticipated results of the recent elections in India, the economic scenario in the country remains somewhat unpredictable, driven by the market sentiment surrounding the coalition government.

Even with the market sentiment remaining uncertain, the outlook of India remains bright with revised upward growth projections for 2024 and 2025. Robust public investments and strong private consumption remain the main drivers of growth for the country.

India’s Boosted Economic Forecast

The UN revised India's growth projections upward for 2024 from 6.2% to a robust 6.9%, driven by robust domestic demand and expansion in both manufacturing and services industries, according to Business Standard. The projection for India's GDP growth in 2025 remains unchanged at 6.6%.

The IMF has also taken the same stance as the UN, revising the country's growth rate upward. Per Reuters, the IMF forecasts India's economic growth for 2024-2025 to be 6.8% versus the previous estimate of 6.5%, fueled by robust domestic demand and an increasing working-age population.

The Reserve Bank of India recently announced that its rate-setting panel had revised India's FY25 real GDP forecast upward to 7.20% from the earlier estimate of 7%, per The Economic Times. The RBI also raised its quarterly forecast for the period, now expecting growth to consistently exceed 7% in each quarter.

India's Sovereign Rating on the Rise

According to CNBC, S&P Global Ratings upgraded India's sovereign rating outlook from 'stable' to 'positive,' maintaining the rating at 'BBB,’ driven by robust economic growth, improved government spending quality and a strong political commitment to fiscal consolidation. Per Reuters, Citi forecasts further upgrades by S&P Global Ratings, by late 2026.

Post-Election Political Landscape

Losing the majority and forming a coalition government initially caused market volatility, indicating a decline in Modi's influence. However, since the election results, markets have resumed their upward trend.

Resuming power for the third term, prime minister Narendra Modi and other prominent ministers of the Bharatiya Janata Party (BJP)-led NDA-III government have retained key cabinet portfolios. The cabinet ensures stability while underscoring the government's commitment to policy continuity and sustained economic development.

Historical Perspective on the Market

The past performance of Nifty 50 during election years, since 2000, reveals significant trends, with elections triggering sharp market movements but stabilizing within one-six months, according to The Economic Times.

Since 2000, the Nifty 50 saw negative returns only once in the month following the 2004 election results. However, it recovered those losses within just five months as showcased by the performance of the Nifty 50 which gained about 6.6% after the elections results since Jun 4.

According to Naresh Bulchandani, Head of Products & Advisory at Merisis Wealth, as quoted on The Economic Times, during the previous NDA-I and NDA-II governments, the Nifty 50 returned 62% and 88%, respectively, highlighting the fact that the market paves its path closely linked to the corporate earnings cycle, irrespective of the government.

Coalition Government's Economic Implications

Emphasis on increasing India’s share of global manufacturing by the government could see a raft of business-friendly measures, promoting companies to take up manufacturing in Asia’s third-largest economy.

Restrictive labor laws, difficulties in acquiring land and an inefficient tariff regime prove to be significant hurdles in India’s gaining a larger share of global manufacturing, per the Hindu. However, according to Aljazeera, coalition partners could potentially aid the Modi government in advancing its stalled initiatives for land and labor reform, crucial to expand the manufacturing sector.

According to Reuters, as quoted on the Hindu article, India aims to increasing its share of global manufacturing to 10% by 2047. Tanvee Gupta Jain, Chief India Economist at UBS, as quoted on Business Today, anticipates the government to execute more stringent land reforms, with increased focus on  supply-side reforms, including enhancements in manufacturing, labor law enforcement, increased infrastructure investment and job creation.

According to The Economic Times, economists anticipate a rise in spending on populist measures due to coalition politics, with the government remaining committed to its “Made in India” reforms. Infrastructure and manufacturing sectors are set to take the centre stage with more focus on welfare and support schemes for the broader population.

ETFs in Focus

India's growth story remains promising regardless of the political landscape. However, uncertainties arise as the BJP fails to secure a majority, leading to the formation of a coalition government. Increasing geopolitical tensions further complicate the situation.

Anticipation mounts for the current government to prioritize policies aimed at attracting global companies and establishing India as a global manufacturing hub, bolstering its economic outlook. This sentiment aligns with the optimistic views of rating agencies.

Below, we highlight a few ETFs for investors to increase their exposure to India and tap its economic prospect.

iShares MSCI India ETF (INDA - Free Report) has gained 3.36% over the past three months and 26.62% over the past year.

WisdomTree India Earnings Fund (EPI - Free Report) has gained 4.47% over the past three months and 37.89% over the past year.

Franklin FTSE India ETF (FLIN - Free Report) has gained 3.98% over the past three months and 30.57% over the past year.

iShares India 50 ETF (INDY - Free Report) has gained 1.87% over the past three months and 18.54% over the past year.

First Trust India NIFTY 50 Equal Weight ETF (NFTY - Free Report) has gained 1.89% over the past three months and 27.11% over the past year.

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