Modi’s emphatic victory

Ewan Thompson, manager of Neptune India Fund, discusses what the outcome of India's recent elections means for investors.

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  1. Ewan Thompson

In April and May 600 million Indian voters went to the polls and emphatically returned Narendra Modi’s BJP party to government. The election has dominated domestic conversation and became a predominant driver of equity market returns over the past six months, and the result is significant for a number of reasons. Indeed, it is the first time in 50 years that an incumbent government has come back to power with a majority on its own. At the beginning of this year, the major concern in the market was of a return to a messy coalition government that has been a feature of Indian politics over the past half century. The decisive victory of the pro-business BJP party in 2014 marked a clear break with business-as-usual politics and as such markets have been looking for a clear signal of continuity in terms of policy and reform agenda. And this is exactly what has been delivered.

Despite expectations for Modi and the BJP increasing steadily since February, the final seat tally has revealed that the result surpassed even these elevated expectations, with the BJP in fact securing more seats than it did in the previous election, providing an extremely strong mandate for government. Moreover it is notable ‒ and encouraging ‒ that incremental electoral gains were made in Eastern and Southern states, which lie outside of the Hindu heartlands that forms the core base of the BJP’s support, indicating a broadening of support across religious and geographic divisions. Indeed, the BJP’s vote share increased significantly from 31% in 2014 to 41% in 2019 ‒ again reiterating a clear mandate across the country for the government to continue with the reform agenda commenced five years ago.

The past five years have seen the implementation of necessary and vital reforms that have the potential to invigorate India’s already vibrant economy over the coming decades ‒ including the long-awaited Goods & Services Tax (GST). The tax has harmonised cross-state tax rates and bankruptcy reform, which has given much-needed impetus to the banking sector, and investors will now be looking for a continuation of this pro-growth agenda.

Perhaps the most pressing item for Modi’s second term is to kick start the private sector investment cycle that India requires. The new government will now be turning its attention to pushing India’s growth rate upwards from the current 6-7% range towards 10%, by stimulating public sector investment, which in turn should encourage private sector capex. In this regard, it is worth drawing a parallel with Modi’s experience as Chief Minister of Gujarat, where he secured his reputation by developing the state into one of the most successful states in India. It was in his second term that Modi aggressively pursued infrastructure projects, having established a competent, stable and functioning administration in the first term. Investors will be looking for a similar approach on the national level over the next five years ‒ a pro-active government looking to stimulate investment and drive economic growth higher.

Whilst global headlines are dominated by concerns over US-China trade tensions, India provides a refreshingly domestically-oriented investment opportunity ‒ with low export dependence ‒ and one of the least correlated emerging markets to global newsflow. Now the election is over, markets can now once again look forward to clearer skies ahead in terms of economic growth and corporate earnings, with the government in a position to build on last term’s reforms and reflate the economy. The business cycle remains in a lull and the government and Central Bank are now in a position to provide both fiscal and monetary stimulus to jump-start the economy. We expect to see further interest rate cuts this year, we have already seen a 0.5% reduction this year, with inflation remaining benign.

In an uncertain global environment India remains a highly attractive domestically-driven investment story. The elections and uncertainty over their outcome had provided a degree of idiosyncratic uncertainty that has now been removed, allowing investors to focus on the prospect of continuing economic reform alongside robust economic growth. The mandate for Modi’s next term offers a clear pathway to both reform and growth.  

Ewan Thompson is manager of Neptune India Fund.

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