The Modi 3.0 government with its vastly reduced majority is expected to focus on welfare measures and even resort to populism at the expense of fiscal consolidation, brokerages said.

Rural India will now get greater attention, with consumption-led development a focus area as the markets expect to take cues from the full Union budget, which is likely to be presented in July.

The political developments come just days after the Reserve Bank of India (RBI) gave a record ₹2.11 lakh crore dividend to the Government.

``It is likely that Narendra Modi will return as Prime Minister for a third term. However, he will have to contend with changed circumstances,” a note from Emkay Research said.

“Firstly, the BJP will be dependent on regional allies such as Telugu Desam and Janata Dal (Secular), and make policy adjustments accordingly. Second, there will be greater demand to stimulate consumption in the economy from both, the BJP and allies,’’ the note said.

While factor market reforms such as those related to land, agriculture and labour are now off the table, privatisation and asset monetization are also at risk, which could drag government capex in the short term, Emkay said.

Emkay said there could be a “market derating’’ in the short term as the risk on India has gone up. ``PSUs and capital goods are the most vulnerable sectors, from which we would stay away for the time being. On the other hand, consumption should come back and we see FMCG and value retailers making a strong return.”

According to UBS, the results imply a return of coalition government politics in India after 10 years. ``As the BJP does not have simple majority of its own, the bargaining powers shift materially within the alliance’’.

UBS has sketched three scenarios: one, Narendra Modi coming back as PM in a coalition. In this case, the NDA will not function as smoothly as in the last 10 years when the BJP had strong control over the government machinery.

The second scenario would be the NDA forming the government but with a new PM, and the third would be key NDA partners switching over to the INDIA alliance.

UBS said the first scenario will be the most positive for the markets. ``While the overall focus on infrastructure and capex would continue, some fiscal room may need to be made for populist measures. This could mean some delays in fiscal consolidation path.”

``This (the results) is likely to lead to a major shift in political policy with a focus on social economics, which will have a positive effect on the rural economy,” Vinod Nair, head of research, Geojit Financial Services said.

The reformistic approach, which was a hallmark of the previous two terms of the NDA government, might take a backseat, Manish Chaudhary, head of research, StoxBox, said.