State elections begin! Morgan Stanley shares view on biggest risk, 2024 polls

Morgan Stanley said its constructive narrative on India is dependent on a continued focus on supply-side reforms. A continuation of this, it said, would be linked to the election outcomes. In a note, the foreign brokerage said a policy stability would be key to keeping the confidence of foreign and domestic corporate sector buoyant. It said only a stable majority government would be able to continue to push through policy reforms and sustain the shift in boosting private investment.

"As for the November state elections, we would closely track the results for signs of read-across to the general elections. The pushback from some investors is that state elections should be viewed separately from the general elections. But from our perspective, either the state election results or moves from the opposition alliance that makes it seem that that the opposition alliance is gaining in momentum would nonetheless raise market’s concerns over political and policy continuity," Morgan Stanley said.

The broking firm said a key risk would be the emergence of a weak coalition government, which could result into a pivot back towards redistributive policies at the expense of the focus on boosting capex and implementing supply-side reforms.

According to Morgan Stanley's head of India research and equity strategy, Ridham Desai, the stock market is seemingly pricing in an outcome of policy continuity for now. He highlighted that equity markets could turn lower in other scenarios.

For now, "We have been constructive on India’s outlook for some time, highlighting that India offers the best domestic demand alpha opportunity within Asia and one of the best structural stories over the medium term globally," it said.

Morgan Stanley said rising investment-to-GDP ratio would create new economic opportunities and lead to rising formal employment and higher income growth. This would, it said, help spur consumption growth and attract more investment, thus creating a virtuous growth cycle.

"With each incremental rise in spending going more towards the formal sector – the market will benefit," it said.

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