This article was part of a newsletter called the Indian Technology Review that we send to our LPs.

India's much-anticipated general election results are in, and they've thrown up a curveball. The incumbent Bharatiya Janata Party (BJP), widely expected to secure a comfortable single-party majority based on exit polls and pre-election surveys, has fallen short of the magic 272 seats in the Lok Sabha. The BJP-led National Democratic Alliance (NDA) will still form the government, but with a razor-thin margin and coalition compulsions. This wasn't the decisive mandate markets and investors were betting on. As India stares at a potentially fragile government, tough questions arise on policy continuity, structural reforms and capital flows.

A Mandate Diminished

In 2019, the BJP won a thumping 303 seats riding on Prime Minister Narendra Modi's popularity and its nationalist plank. That number now stands reduced to 240 seats, its lowest tally since 2014. In contrast, the opposition Indian National Developmental Inclusive Alliance (INDIA) has posted surprising gains with 234 seats. The rest have gone to regional parties and independents, who will now play kingmaker. The NDA's final tally of 291 seats, while above the halfway mark, is far from the 350-400 range most pollsters were projecting.

This isn't just about numbers. The BJP's underwhelming performance points to simmering discontent among the electorate, especially at the lower end of the socio-economic pyramid. Despite India's resilient post-pandemic growth, the 'K-shaped' recovery has left behind the masses. Sticky inflation, rural distress and sluggish job creation have dented the government's promise of 'sabka vikas' (development for all). The results are a wake-up call that headline GDP numbers aren't reflecting ground realities. It's also a reminder that nationalist pride has its limits in putting food on the table.

Policy Continuity with Caveats

With the NDA set to retain power, broad policy continuity is expected. The government's core economic agenda - infrastructure buildout, manufacturing push, digitalization drive, financial inclusion - is unlikely to be derailed. However, the tenor of policymaking could change. Some populism may take precedence over prudence, as evidenced in the BJP's manifesto promising free power, increased subsidies and cash transfers. Fiscal consolidation targets might be relaxed to accommodate higher social spending, though not recklessly.

On structural reforms though, the picture is hazier. Contentious issues like land acquisition, labour reforms and privatization may be put on the backburner given the BJP's depleted political capital. Coalition pressures could also force compromises on legislations like the Uniform Civil Code and the Citizenship Amendment Act which have been key BJP planks. Even the Goods and Services Tax (GST), a signature reform of Modi's first term, may see a slower trajectory towards rate rationalization and simplification. The BJP's reform ambitions will have to be tempered by realpolitik considerations.

This isn't to say India's reform story is over. But the pace and scope will be more measured. Rather than big bang announcements, the focus could be on incremental gains and implementation. The government may prioritize reforms that have a visible impact on ease of living and doing business, such as cutting red tape, digitizing public services and enhancing logistics efficiency. It could also push through pending bills on data protection, cryptocurrency regulation and e-commerce, which enjoy broader consensus. But game-changing moves like land and factor market reforms might have to wait for more propitious political times.

A Capital Flows Conundrum

The less-than-emphatic election verdict also has implications for capital flows into India. Foreign investors have pumped in over $24 billion into Indian equities over the past year, in part enticed by the promise of political stability and policy predictability. The hung parliament scenario could introduce a risk premium, triggering knee-jerk outflows in the near term. Sectors that were betting on big reforms or liberalization, such as insurance, banking and retail, could see a sentiment hit.

However, India's structural attractiveness as an investment destination remains intact. Domestic consumption, infrastructure and manufacturing are still compelling long-term bets. The government's Production Linked Incentive (PLI) schemes have already catalyzed over $500 million of foreign direct investment (FDI) commitments across 14 key sectors. Venture capital funding for Indian start-ups also hit a record $50 billion in 2022 and could scale new peaks this year as investors double down on internet and SaaS opportunities. The startup ecosystem is expected to be largely insulated from political vagaries given its exposure to global technology cycles.

The worry though is around portfolio flows. Risk-off sentiments globally could amplify domestic political uncertainties, triggering sharper corrections in Indian equities. Within sectors, defensive plays like consumer staples, healthcare and IT could outperform cyclicals like capital goods, banks and autos. Credit Suisse estimates that the Nifty could de-rate by 5-7% in the short term as investors reprice policy risks. However, the brokerage remains constructive on the medium-term outlook driven by supportive liquidity, earnings resilience and domestic flows.

On the debt side, inclusion in global bond indices and a relatively stable currency will help cushion outflows. The rupee has been among the best-performing emerging market currencies this year, backed by record forex reserves of over $600 billion. Inflation risks are also ebbing, with consumer prices expected to average 5% this fiscal, creating space for accommodative monetary policy. The government's funding program won't be hamstrung either, given the ₹1 trillion bonanza from the central bank's record dividend payout. So while political flux might inject bouts of volatility, India's macro fundamentals remain a bulwark.

Reimagining the India Story

The 2024 election marks a seminal moment in India's growth trajectory. It's a reminder that the India story can't just be a top-down technocratic project. It needs a bottom-up groundswell (much like our investment thesis!) to be truly inclusive and sustainable. The incoming government's challenge will be to weave together an economic narrative that speaks to the aspirations of India's youth, women and marginalized communities. It needs to create jobs, not just unicorns; livelihoods, not just digital platforms.

For investors, it's time to introspect. Political stability can't be taken for granted in a vibrant, multi-hued democracy like India. Bets need to be built on structural drivers, not electoral math. Themes like formalization, digitization, sustainability and inclusion will outlast any single government. The start-up ecosystem offers a template for navigating volatility by solving for real pain points at the grassroots. Ventures that tap into India's diversity - linguistic, regional, socio-economic - could be the biggest winners over the next decade.

Perhaps this is an opportunity to reimagine the India story beyond the personality politics and sectoral fads. India's economic destiny lies not in the hands of a supreme leader but in the dreams and struggles of its billion-plus citizens. If the 2024 verdict is any indication, the real coalition India needs is between Bharat and India, farm and factory, small towns and big tech. That would be a mandate beyond mere numbers.