India's Prime Minister Narenda Modi has successfully secured a second term in office, winning an increased majority at the 2019 Indian general election. His party, the Bharatiya Janata Party (BJP) gained 21 seats this week, giving it a total of 303 out of 542 in the Lok Sabha, India’s lower parliamentary house. The BJP will now form a government once again with its National Democratic Alliance partners including Shivsena, which won 18 seats, and Janata Dal (United), a party that finished the election with 16 seats after a positive 14 seat swing. The group will now have a near two-thirds majority in the house.
Figures from the investment sector who specialise in India have started responding to the electoral success of Mr Modi, commenting positively on its implications for investors and the future of the nation’s economy.
Ramesh Mantri, Director of Investments at White Oak Capital Management, a company that advises the Ashoka India Equity Investment Trust, was pleased that the result was decisive. He believed that the outcome would give the Prime Minister the mandate to make India more enterprising and attractive to investors.
He said: “The strong decisive mandate by Indian citizens to the NDA government will ensure continuity of existing reforms process and also embolden PM Narendra Modi to accelerate India's transformation into a more market-oriented economy. It is India's opportunity to dismantle its archaic laws, carry out major structural reforms, further improve the ease of doing business and free up resources from inefficient public enterprises to aggressively invest in both infrastructure and human resources. An environment conducive to enterprise will improve the dynamism of the economy, create jobs, accelerate growth, and in the process also be rewarding to investors.”
Maarten-Jan Bakkum, Senior Emerging Markets Strategist, at NN Investment Partners, also believes that the win would benefit investors, but he did raise challenges that the country needed to overcome if it was going to succesfully reform its economy.
He argued the result would have a positive effect on worldwide markets provided that Modi’s proposed reforms to India’s social and economic structures were implemented. He also suggested that the closed-nature of India’s economy should protect it from difficulties arising from the escalating trade war between China and America.
He said: “Overall, the Modi win should be good for markets, as long as new reform initiatives will not be too long in coming. The result is also particularly relevant in the current global environment where EM investors are primarily worried about Chinese trade and pressure on Asian IT supply chains. India is a relatively closed economy, with limited vulnerability to these issues.
Mr Bakkum did, however, argue that there were potential vulnerabilities in India’s economy, which could make the investment landscape more volatile. For example, India remains vulnerable to higher oil prices, a likely consequence of any potential military conflict between the US and Iran.
He said: “At the same time, India is vulnerable in a scenario of an escalating US/Iranian conflict resulting in higher oil prices.”
Mr Bakkum suggests that India remains vulnerable to oil price rises due to its reliance on oil imports. This a factor that is unlikely to change in the immediate future with the GDP of the country so reliant on consumption levels. He doubts Modi will make progress on this point, and argues that the vulnerability to oil prices, alongside issues concerning the deficiencies of state-owned banks will continue to present problems to investors regardless of the election result.
He said: “The main problem currently is the weakness in the state-owned banks and the non-bank financial companies. It is generally expected that the new government will focus on reducing bad debt levels and tighten regulation to avoid more problems in the future. The eventual result of these efforts should be a higher pace of overall credit growth, to consumers and corporates. Other challenges lie in the field of labour reforms, a better implementation of infrastructure investment plans and the reduction of red tape, that particularly would help the export sector.”
“Equally important is a stronger commitment to reduce the country’s fiscal deficit and new initiatives to make India less dependent on oil imports. It is questionable whether the new Modi government can make progress on these two points. The pressure is high to increase social transfers, particularly to the rural population, where drought problems have been intensifying in recent years.”
Nevertheless, Mr Bakkum concluded that the results would not have any significant effect on the investment strategy at NN Investment Partners.
He added: “We have been overweight Indian equities for years and after this year’s election results, we think that the outperformance trend of Indian equities, that is already ongoing since 1996, will continue.”
Shashank Savla, co-manager on the Liontrust Asia Team, also suggested that the result would not really affect the investment decisions of the Liontrust Asia Income Fund. However, he cited negative reasons for the decision, stating that its fund would remain underweight due to the slow nature of land reform in the country. Although he praised the performance of Mr Modi's during his first term in office, he also doubted whether the Prime minister would be able to unlock India's potential and create enough jobs to maintain the country's current levels of growth.
He said: "Modi’s record over the past five years has been mostly positive. We expect him to continue to push through reforms, which should boost India’s medium term growth outlook. Apart from the majority in the Lok Sabha (Lower House), Modi will also benefit from an increase in seats in the Rajya Sabha (Upper House), where his alliance now controls 101 out of 245 seats.
While Modi is expected to continue with infrastructure spending and supportive measures for the housing sector, what could really unlock India’s growth potential is if he could go ahead with land reforms. Restrictive and time consuming land acquisition policies hamper the ability to invest in significant infrastructure projects. Apart from land acquisition, restrictive labour policies also impede the setting up of large-scale manufacturing plants. While both land and labour reforms have always been politically difficult to achieve, especially given the history of weak coalition governments, they are necessary to create the millions of jobs that Modi has promised."
Delving into the data, Mr Savla also pointed to the premiums involved with investing in India, which were likely to remain a problem regardless of the election result.
He said: The Indian market index (Nifty) rose more than 2.5% yesterday after preliminary results were announced, but ended at 0.5% below the previous day’s close, falling alongside other Asian markets. We remain slightly underweight India in the Liontrust Asia Income Fund, primarily due to the expensive valuations, where India at a forward price/earnings ratio of 18x is at a significant premium to 13x for the wider Asian region. India’s current valuations discount a lot of positives in our view, and leave little room for any failure in execution."
David Cornell, Managing Director and Chief Investment Officer of Ocean Dial, and fund manager of its India Capital Growth Fund was more glowing in his assessment, and suggested that the result was a positive reflection on India’s investment possibilities. His views maintained the theme that, despite potential future issues concerning geo-politics and oil dependency, that Mr Modi’s re-election would make India more friendly for investors.
He said: “The re-election of Narendra Modi reignites the investment case for India. We anticipate that reform based policy initiatives (such as the Banking and Insolvency Act and Goods and Services Tax) can gather momentum as the focus switches to creating productive employment & ensuring India continues on a more business and investment friendly journey.”
