As election fever pushes Indian equities to fresh record highs, economists warn that the market and electorate may have unrealistic expectations of front-runner Narendra Modi.
The benchmark Sensex rose 2.4 percent to 23,551 Monday on optimism that Modi's opposition Bharatiya Janata Party (BJP), seen as being more investor friendly than the incumbent Congress party, will win the country's elections.
"The burning question is whether Mr Modi can fulfill the high hopes of investors and the electorate… we remain skeptical that a change of prime minister will be the panacea that many investors are hoping for," Miguel Chanco and Daniel Martin, economists at Capital Economics wrote in a note.
India's elections, the world's biggest democratic exercise in history, drew to a close Monday, with exit polls predicting a simple majority for the BJP-led National Democratic Alliance (NDA).
A poll average puts the number of possible parliamentary seats for the NDA at 276, with the BJP getting 232 seats, according to calculations by Goldman Sachs. An alliance needs 272 seats to gain a majority of the 543 seats in the Lok Sabha - or India's lower house of parliament.
Although these polls have proved unreliable in previous elections, the market looks to them for clarity on what the final results due to be released on May 16 may look like.
Modi is credited with turning Gujarat - the state where he currently serves as chief minister - into an investor-friendly economic powerhouse. As chief minister, he has worked to encourage foreign investment, provide reliable electricity, and engage in intelligent urban planning.
Annual economic growth in the state averaged over 10 percent from 2006 to 2012 - well above the national average.
The elections are taking place against amid an economic slowdown. India's gross domestic product growth slipped to 4.7 percent in the last quarter of 2013 from near-9 percent expansion in fiscal year 2011.
Capital Economics argues Modi is likely to struggle to gain the full cooperation of most state governments needed to implement his agenda on a national level. India's federal structure means there are key policy areas where cooperation is needed.
The Congress party's failure to open up the multi-brand retail sector to foreign direct investment nationwide, for example, was due to state-level opposition.
The BJP and its allies currently have control of only eight of thirty state governments, accounting for a mere fifth of India's economy, according to Capital Economics.
Secondly, there are also stakeholders outside the government that will need to be contended with.
Modi has put forward an encouraging economic agenda including reviving the manufacturing sector to create millions of jobs. As part of this push, he would need to reform labor laws that make it difficult to fire workers.
However, Chanco and Martin note that, "making it easier to lay off workers is a political landmine."
Finally, if Modi is to plough more public funds into infrastructure – as outlined in the BJP's manifesto - he will need to save money in other areas or raise taxes, since the fiscal deficit is already dangerously large.
"The most obvious area for cutting spending is on subsidies, but reducing subsidies would be deeply unpopular with much of the electorate and the BJP's plans have been notably silent on this issue," Chanco and Martin said.
As such, Capital Economics says it expects economic growth to be stuck around the 5-5.5 percent range in the medium term.
"We will not be raising our forecasts until we see real progress on reform," they said.