The Indian stock market experienced its worst crash in four years after the Bharatiya Janata Party (BJP) of Indian Prime Minister Narendra Modi lost its parliamentary majority.

The surprise result of Tuesday's vote count means Modi will have to rely on smaller parties to form a governing majority in the 543-member Lok Sabha, the lower house of India's parliament, raising doubts about the Indian president's ability to push through his pro-business agenda.

The NSE Nifty 50 and BSE Sensex indices closed 5.93 percent and 5.74 percent lower respectively on Tuesday, after falling as much as 8.5 percent earlier in the day.

Indian stocks posted further losses on Wednesday morning, but recovered in the afternoon. At 05:30 GMT, the two indices were each up more than 1.5 percent.

Why did investors react negatively to the election results?

Investors have been largely positive about Modi's economic agenda during his ten-year term.

Modi has promised to transform India into an industrial nation by 2047. He has made massive investments in infrastructure, promoted domestic manufacturing, attracted foreign investment, cut red tape and promised to eradicate corruption.

Under the leadership of the Indian president, the value of the Nifty 50 index has almost tripled – although some analysts argue that many Indian companies are now overvalued.

Earlier this year, India's market capitalization exceeded $4.3 trillion, overtaking Hong Kong as the world's fourth-largest market.

Indian stock prices hit record highs ahead of Tuesday's surprise election result as post-election polls showed the BJP-led National Democratic Alliance (NDA) on course for a landslide victory.

Modi, a popular but polarizing politician, has presided over a period of strong economic growth in the world's most populous nation.

Gross domestic product (GDP) grew by 8.2 percent in the last fiscal year, far outperforming most developing and industrialized countries.

Over the last decade, GDP per capita has increased from about $5,000 to over $7,500.

During this period, India developed from the ninth largest to the fifth largest economy in the world.

While Modi has all but secured a third term as prime minister, as he must negotiate with smaller parts of his coalition, there is a possibility that he may have to compromise on some aspects of his economic agenda.

“A very large majority for the BJP-led NDA would have meant greater willingness to reform and less need for populist measures and a continuation of the investment agenda,” Garima Kapoor, economist and senior vice president at Elara Capital in New Delhi, told Al Jazeera.

“Markets are reassessing this shift and as a result, most public companies, state-owned banks and investment-oriented stocks are experiencing a significant correction.”

Alexandra Hermann, an economist at Oxford Economics, said Modi's smaller-than-expected majority would make it difficult to pass reforms in land, labor and capital regulation.

“Further – less controversial – investments in infrastructure are likely to remain a focus,” Hermann told Al Jazeera.

But perhaps more than anything else, markets hate uncertainty – and this dynamic was reinforced by Tuesday's unimpressive result.

What impact will the elections have on India’s economic policy?

Many of India's economic advantages are unaffected by the outcome of the election or by who is in power.

No matter which direction Modi's coalition takes, the country will continue to benefit from its large, relatively young population.

New Delhi, which has traditionally pursued a non-aligned policy, is also likely to continue to benefit from its distance from the geopolitical rivalry between the United States and its allies on the one hand and Russia and China on the other.

“We do not believe the election outcome impacts the longer-term outlook of the Indian market, which is supported by longer-term tailwinds of favorable population demographics and ongoing geopolitical tensions between China and the US that favor a shift to India,” Gary Tan, portfolio manager at Allspring Global Investments, told Al Jazeera.

Kapoor of Elara Capital said she does not believe the election result will lead to a significant change in policy in the long term.

“In the long run, an NDA of 290 or 310 does not mean a big difference in terms of policy approach. Overall, the shift is mainly about whether we see aggressive supply-side reforms or a balance between supply-side and demand-side reforms,” ​​she said.

Will the boom on the Indian stock market continue?

Despite India’s impressive GDP growth, the country’s economy faces serious challenges, including widespread poverty, growing inequalityand pervasive corruption.

One of the most pressing problems is Lack of quality jobs to meet the needs of its huge population.

The International Labour Organization warned in a report published earlier this year of a “mismatch” between the aspirations of India’s well-educated young people and the jobs available.

“Beyond a narrow view of the unemployed, there is a large proportion of young people, especially young women, who are neither in education nor in employment or in further training,” the UN body said.

Another problem, according to Tan, is the increasing indebtedness of Indian private households.

“The Reserve Bank of India has intervened to control this risk. While this is positive for a more sustainable growth path, the short-term costs may lead to slower credit growth at a key inflection point in India, where private corporate investment is trying to catch up with underinvestment in previous years, while major infrastructure projects are also being taken up,” he said.

After years of rapid gains, many Indian companies are now overvalued, according to some analysts, partly due to the huge influx of inexperienced local retail investors into the market.

Last month, financial services firm Morning Star quoted a portfolio manager in an analysis as saying that Indian stocks were trading at higher prices than stocks in other emerging markets.

“We continue to be very selective in the companies we invest in, favoring those that have sustainable earnings power and whose share prices are below our estimate of their intrinsic value,” Morning Star quoted Chetan Sehgal of Franklin Templeton as saying.