Change for India's economy long way off, despite election

What is Modinomics?
What is Modinomics?

As the world gears up for its largest ever democratic election this week investors are getting excited about the prospect of change for India's beleaguered economy, but analysts told CNBC investors need to take a breath.

Some 814 million eligible voters will head to the polls this week to choose representatives for the 543-seat Lok Sabha, or lower house of Parliament, in what will be the biggest election in history.

Voting will last until May 12 and votes will be counted on May 16.

"People are watching the elections because they are looking for that change, especially investors… as it will signal a change of pace," said Tony Nash, vice president at economic research firm IHS.

(Read More: World's biggest election: Game changer for India?)

"You only have to look at the Indian markets to see how they popped a week ago, and that vision and that hope even popped pre-election," he added, referring to Indian stocks' 3 percent surge since mid-March.

Stocks on the Sensex are up 12 percent since early February.

If recent opinion polls turn out to be correct, the opposition Bharatiya Janata Party (BJP), led by Prime Ministerial candidate Narendra Modi, is likely to win, a prospect which has excited investors given Modi's more business friendly stance.

Indian poll officials check Electronic Voting Machines (EVM) at a distribution centre in Nagaon, some 180 kms east of Guwahati on April 6, 2014.
AFP | Getty Images

Two polls were released hours before voting started, one suggesting the BJP would achieve a strong majority while another said the party would fall short of a majority by 30 seats.

(Read More: Why India's state elections matter)

A lack of a majority would not be good news for policy momentum and could lead to a continuance of the 'horse trading' - political vote trading - which is broadly seen as an immoral practice.

According to Leif Eskesen, chief economist for India and ASEAN at HSBC, it may be too soon to start banking on a turnaround.

"It [the Indian economy] is in the process of bottoming out, but I think the important thing to understand about where it's going to head up from here, is that it's going to take a while for it to climb back up," said Eskesen.

"The key thing for markets is to not overestimate in the short term what the implications of the elections in the real economy can be," he added.

India's economic growth slowed to 4.7 percent in the final quarter of 2013, down from a near 9 percent expansion in the fiscal year 2011.

What are Indian voters most concerned about?
What are Indian voters most concerned about?

People in India have grown frustrated by the current government's handling of the economy and its string of corruption scandals, and are yearning for a change in leadership from the Congress-led ruling coalition known as the United Progressive Alliance.

BJP leader Modi has been chief minister of the Indian state of Gujurat since 2001, and his work there boosting foreign direct investment and his ability to push policy through quickly has contributed to investor optimism over how beneficial a BJP win could be for India, analysts told CNBC.

(Read More: Is the rupee overvalued? Rajan isn't worried yet)

"Based on his history he's looking at investment in things like heavy industry, power, infrastructure... I think it will be really good for India… [but] obviously building those institutions is hard work. Will he have the runway to build those institutions is the real question?" Nash added.

HSBC's Eskesen agreed that a BJP win could potentially improve the momentum that reforms are pushed through, but again said it was important to be realistic.

(Read More: This major lender sees India growth at 8% in 5 years)

"It increases the probability of it [change], but again you have to be realistic about how quickly it can [happen]. At the same time investors shouldn't underestimate what the impact could be in the medium term either," he said.

Eskesen added that a favorable election outcome in India help buoy economic growth to 5 percent in the current fiscal year (ending 31 March 2014) and around 6 percent in the next fiscal year from April 1 2014 to 31 March 2015.

— By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie