Modi's election failure in India sent Wall Street into a tailspin

Indian Prime Minister Narendra Modi's stunning political setback has the country's business executives making angry calls, trying to better understand the impact on the Indian economy and investment landscape after Modi failed to secure an overwhelming majority for his party.

“Indian voters are great teachers. They have certainly surprised politicians, pollsters and market watchers,” Venugopal Jhar, managing director at AB Bernstein, wrote to clients in an email.

Over the past several years, CEOs of some of the largest companies in the United States have invested time and money in relationships with Modi, as they set their sights on the Indian market.

General Electric outer space, apple, Starbucks And Nvidia It is among the companies that have concluded high-profile deals to expand, manufacture and sell its products within the country.

“With China slowing down, India has become a preferred destination for US tech giants,” Pramit Chaudhary, head of the Eurasia practice in South Asia, told CNBC on Tuesday.

The Indian stock market witnessed a sell-off on Monday following the shock election results – recording its biggest decline since 2021.

The result is “a clear negative that is likely to create a drag on the market in the near term,” said Rahul Sharma, emerging markets portfolio manager at Schiffer Cullen, an investment firm with $6 billion in assets under management.

However, Sharma remains hawkish on the long term on India, citing the country's strong demographic situation.

“Don't forget the huge potential of the country with per capita income still at a low level and huge advantages such as a large, young and relatively educated workforce,” Sharma said.

Modi's failure to secure an overwhelming majority for his party also raises new questions about the Modi government's broader economic agenda.

Specifically, whether the promised reforms will be passed in a rapid manner, as Modi pledged to do during his election campaign.

“Coalition governments always face problems, especially when making economic plans,” the Asia Society's India team wrote in a note to clients.

“Most economic reforms will require the Indian leader to persuade…negotiate…work with parties across the aisle which could lengthen the timeline for getting things done,” a former government official told CNBC, who was granted anonymity in order to discuss the matter. “. Private conversations.

The question now is whether Modi is able to shift from ruling as the leader of the supermajority to ruling as a consensus builder.

Modi's goal is to make India the world's third-largest economy by 2027. It is currently the world's fifth-largest economy and had growth of 8.2% in the fiscal year ending March.

But India's impressive GDP last year masks a high unemployment rate, which is crippling the career prospects of younger workers and pushing millions to leave cities and return to rural communities.

“The unemployment situation in the country certainly contributed to a tougher election,” Eurasia's Chaudhry said.

“Job shortages are the biggest concern for voters because the labor market recovery is not yet broad-based,” TS Lombard analysts wrote in a note to clients on Tuesday.

Now, one of the labor laws that the Modi government intended to reform may not be implemented, because Modi's party, the Bharatiya Janata Party, no longer has an absolute majority in Parliament.

Modi's proposed reforms would simplify laws on hiring and firing workers and remove other barriers to a more flexible labor market.

Other analysts say major reforms related to agriculture and land tenure may also take longer than previously expected. Infrastructure projects should continue, but like other sectors, perhaps at a slower pace.

In the near term, new governance dynamics in the Indian Parliament may require a reset of corporate expectations in the United States. Some reforms may take more time under a coalition government.

But experts say US companies still view India as a key part of their long-term strategies to diversify their manufacturing and supply chains beyond mere reliance on China.

“I don’t think the expansion of US companies in India should be affected (by the election results),” said Raghuram Rajan, former governor of the Reserve Bank of India.

He added that American investment never came “because of reforms that would affect this investment.” Rajan is currently a Professor of Finance at the University of Chicago Booth School of Business.

Sharma, of Schäfer Kollen, predicted that the BJP's “aggressive Hindu nationalist” rhetoric will tone down the post-election rhetoric, “which will reduce division and tension in the country.”

The Indian leader has faced criticism over his treatment of minorities, including Sikhs and Muslims, and his government's efforts to silence political opposition.

The election results “could leave India in a socially safer place if they dissuade the BJP from pursuing hardline Hindu nationalist policies,” Tom Miller, an analyst at Gavical Research, wrote on Wednesday.

Once the new government is in place, the next big event will be the release of the annual budget on July 1, said Gitanya Kandhari, head of macroeconomic research in Morgan Stanley's emerging markets equity team.

“This will set the tone and reaction of the new government (regarding spending priorities),” Kandari wrote in an email to CNBC.