The Indian stock market reached a record high and the rupee strengthened against the U.S. dollar on May 23 after partial results indicated Narendra Modi's Bharatiya Janta Party (BJP) is set for a thumping victory in the country's 17th general elections. Ballot counting is still in progress in the early hours of Thursday, but the outcome is clear, and foreign leaders like Russia's Vladimir Putin and China's Xi JinPing have already congratulated Modi. The historic win is being attributed to a "Modi wave," a term used to describe his immense popularity and the unstoppable electoral juggernaut it represents.

India, the world's largest democracy and fastest growing large economy, has around 900 million eligible voters (that's close to one in eight adults globally). The gargantuan election exercise began on April 11 and took place over several weeks.

Indian Government

The country has a parliamentary system of government with the prime minister as its head. Unlike the presidential elections in the U.S., Indian citizens do not vote directly for the prime minister. Instead they elect a local representative, or Member of Parliament (MP), who will receive one of the 545 seats (two are nominated by the president) in the Lok Sabha or lower house. The MPs belonging to the party that establishes a simple majority in the lower house, elect the next prime minister. The prime minister must be an MP either at the time they are chosen or within six months. If no single party wins a majority of the seats, a coalition government can be formed.

Major Parties:

Bharatiya Janta Party (BJP) Narendra Modi, 68, is the incumbent prime minister of India. He is expected to return to power as the right-wing, Hindu nationalist party BJP, of which he is a member, has secured a lead in more than 290 seats. The minimum number of seats required by a party to form the government is 272, and in the last election the BJP won 282 seats.

The party has promised to boost India's GDP to $5 trillion by 2025, $10 trillion by 2032 and make it the third largest economy by 2030. In addition to this, it has vowed lower tax rates for the middle class, capital investment in infrastructure of 100 trillion rupees by 2024, zero tolerance of terrorism, various welfare schemes, a stop to illegal immigration from neighboring countries (except for Hindu, Sikh and Buddhist refugees), and an effort to "facilitate the expeditious construction" of a Hindu temple on land that is currently the subject of a dispute before the Supreme Court.

Although the government has been touted as pro-business and anti-corruption, opposition parties spoke about the impact of the chaotic demonetization of currency notes in 2016 on the economy, the "shoddy" implementation of a tax system overhaul, record unemployment levels, the resignations of two central bank chiefs, the fall of the rupee and allegations of crony capitalism. Modi's flagship Make in India scheme meant to promote India's manufacturing sector has failed to make much of a difference. Manufacturing's contribution to GDP was at 15% in 2017, the same as 2014. The crisis in India's banking sector also remains an unsolved problem.

However, there have been bright spots. The tax base has increased, insolvency procedures have improved, financial inclusion was made a priority, the construction of highways and roads ramped up, Foreign Direct Investment (FDI) hit an all-time high in 2016, India jumped to a record 77th position on the World Bank's ease of doing business ranking and the government launched multiple schemes in the social sector.

Indian National Congress (INC): Although the center-left, 133-year-old Congress party hadn't officially announced its prime ministerial candidate, its president, Rahul Gandhi, was widely expected to take the reigns if it succeeded. Gandhi comes from a long line of political leaders, and the family has headed India's biggest opposition party for decades. The Congress was hit with numerous corruption scandals that led to a historic defeat in 2014's general elections.The party is leading in a measly 53 seats.

If it returned to power, the Congress pledged to increase the share of India's manufacturing sector to 25% of GDP within five years, double spending on health care to 3% of GDP to provide universal health care, scrap electoral bonds and simplify the tax regime. But the economic promise that captured most attention and headlines was a minimum income guarantee scheme, which would have seen 20% of India's poorest families receive about $1034 a year in their bank accounts. “The final assault on poverty has begun. We will wipe out poverty from the country,” said the Congress about the scheme. The BJP responded by saying India's poor already receive a higher amount than this through various Modi government schemes.

Competitive Populism

Unemployment and rural distress caused by stagnating farm incomes are the greatest economic problems facing India currently.

The country has been experiencing an agrarian crisis for several years. Over 300,000 farmers in India have committed suicide since 1995 and indebtedness is the primary reason, according to a report from IndiaSpend.

A research report from Aziz Premji University says that 5 million lost their jobs in India between 2016 and 2018. According to a 2018 Pew Research survey, 76% of adults in India say lack of employment opportunities is a very big problem and 67% say job opportunities have gotten worse over the past five years.

While the BJP will focus on infrastructure and government job quotas for the economically weaker sections, the Congress had different plans which included making sure all 400,000 central government vacancies are filled, the creation of a new Ministry of Industry, Services and Employment, expansion of the education and health sectors and a job guarantee scheme for the rural poor. Both major parties promised direct income support programs and loan waivers for the farmers saddled with debt.

There aren't many structural changes suggested, and it isn't clear how funds for these programs will be found. Experts worry what these promises will do to the nation's fiscal deficit and currency. Big election promises in India aren't new. In 2014, Modi said he would put 1.5 million rupees in each Indian's bank account when he retrieved black money stashed abroad.

Questions Surrounding Data

India's economy grew at a faster rate under the Modi government than the previous Congress government. But there exists a significant amount of doubt about the quality of government data available.

Government data that showed unemployment had reached a 45-year high of 6.1% in 2017-18 was leaked by the press and reportedly withheld by the administration.

After the Modi government slashed the growth rate of the previous government ahead of the polls and revised its own higher, 108 economists and social scientists released a statement that said Indian institutions and statistics were being controlled for the sake of politics. They wrote, "Any statistics that casts an iota of doubt on the achievement of the government seems to get revised or suppressed on the basis of some questionable methodology."

India's former central bank chief Raghuram Rajan, who has expressed his own doubts about government data, said during an interview with CNBC TV18, "I know one minister has said how can we be growing at 7% and not have jobs. Well, one possibility is that we are not growing at 7%." 

IMF Chief Gita Gopinath told CNBC TV18 in April that there are still issues with how India calculates its growth rate and that the IMF is "paying close attention to" newer numbers coming out.

Narendra Modi is also the first Indian prime minister to not take a single question from journalists in a press conference during his entire term.

Investing and Elections

As investors favor stability and policy continuity, growing optimism that Modi will stay in power has helped markets rally and sent India-focused ETFs like iShares MSCI India ETF (INDA), WisdomTree India Earnings Fund (EPI) and iShares India 50 ETF (INDY) soaring.

Goldman Sachs said foreign institutions had bought Indian stocks worth $4.3 billion in March, the largest monthly total in two years, according to a report from The Wall Street Journal

On Thursday, Morgan Stanley said it saw an upside of 15% for India's benchmark indices if Modi secures a win. The brokerage said its call assumes "resolution to the ongoing strain in the financial sector via liquidity infusion and continuing fiscal discipline," according to Moneycontrol.

Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management, warned that it's good for investors to "keep expectations low" about what Modi's return to power would mean. "The reform and change [Modi brought] is different than what was anticipated. He wants to fix things here and there, but it isn’t free-market reform or liberalization—or the kind of change that, for example, is expected from Brazil today, under [President Jair] Bolsonaro," he said to Barron's.

"The biggest risk after elections is the probability of a new government indulging in massive social spending and what impact it will have on the country’s fiscal account," said Tim Love, the investment director responsible for GAM's emerging markets equity strategies, to Bloomberg. "If anyone replaces the incumbent, it will be a material negative as it may slow down reforms."