Modi’s Indian election win welcomed by economists and investors

Financial markets and international investors have hailed a potentially positive economic impact from the re-election of Narendra Modi as prime minister of India, although the positive forecast does come with some conditions, namely that it must be accompanied by promised reforms in the banking sector, increased infrastructure spending and a period of fiscal stability. Mr Modi’s Bharatiya Janata Party (BJP) won a landslide victory in what has been described as the biggest democratic election in history with more than one billion Indians casting their vote. Mr Modi has an enviable backstory in that he rose from a humble tea-seller on the streets of Mumbai to become the country’s prime minister. And with his latest victory he has been credited by some as ending the dynastic politics that has existed in India for so long. However, of more interest to commercial risk managers in India and across Asia will be the economic impact of four more years of Mr Modi and the BJP. Comments from some of the world’s leading investment managers suggest that the impact will be broadly positive, although with some conditions. Maarten-Jan Bakkum, senior emerging markets strategist at Dutch fund manager NN Investment Partners, said that the win “should be good for markets, as long as new reform initiatives will not be too long in coming”. A risk facing businesses and investors exposed to India is the concern about Chinese trade and the pressure on Asian IT supply chains, said Mr Bakkum. “India is a relatively closed economy, with limited vulnerability to these issues. At the same time, India is vulnerable in a scenario of an escalating US/Iranian conflict resulting in higher oil prices.” However, the resounding election win means that Mr Modi will start his second term with a lot of political capital, which he will need badly to have a chance of solving some of India’s main structural problems and to push the overall reform momentum to a higher pace, said Mr Bakkum. “This is necessary to get India back to the 6%-plus growth rates it needs to reduce social inequality and create a meaningful increase in GDP-per-capita.” Mr Bakkum says that the new government is expected to focus on reducing bad debt and tightening regulation in the banking sector to address the weakness of state-owned banks. “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,” said Mr Bakkum. Equally important is a stronger commitment to reduce the country’s fiscal deficit and new initiatives to make India less dependent on oil imports, adds Mr Bakkum. “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.” The economic optimism was shared by other investment experts including Avinash Vazirani, manager of the Jupiter India Fund. “We believe that Modi’s government will continue to focus on good governance and will double down on reforms from here. It is evident that there is little opposition to the BJP at a state or central government level, which we think means that Modi will be able to fulfil a lot of the unfulfilled expectations from his last term. We expect the government to start implementing changes quickly from here, delivering on major structural changes to the land and labour laws, and also focusing on housing, infrastructure, and pulling people out of poverty,” he said. “While we expect India as a whole to benefit from these reforms, in particular we think companies relating to financial inclusion, middle class consumption and infrastructure will be positively impacted. Given that this government has been fiscally prudent and has stated its intention to remain so, we think that they could fund some of these reforms by selling off government-owned assets, so public sector companies could also stand to benefit: in particular public sector banks, where there is already talk of consolidation and sell-offs.” According to Amol Gogate, Asian equities analyst at Swiss money manager Carmignac, one of the most important factors that swung the election in Mr Modi’s favour were the airstrikes inside Pakistani territory in February. “These airstrikes were carried out in retaliation of a terrorist attack in the Indian state of Jammu & Kashmir earlier that month. While international media doubt if the airstrikes managed to target any terrorists, the fact that Mr Modi took such a bold step was widely admired in India,” said Mr Gogate. With the election over, the focus will now revert back to the economy, said Mr Gogate. He referred to the aforementioned problems in the banking sector, a weakening in consumption growth and a strategy to reduce oil consumption. “Lower oil prices in the past five years have helped the Modi government save on oil subsidies and spend on other initiatives,” he said. “Any supply disruptions in the Middle East could mean more trouble for the government’s finances. Mr Modi has announced an ambitious plan to increase manufacturing jobs in India but that requires cutting through the bureaucracy’s notorious red-tape which has proven difficult.” We will get some insight into Mr Modi’s priorities after he names the new cabinet, said Mr Gogate. “In the past five years, two of the most effective ministries were those of Roads and Power led by Nitin Gadkari and Piyush Goyal respectively. Under their supervision, India achieved record levels of road construction and electrification. Hope and aspirations of more than a billion people are riding on Mr Modi’s election victory. In our opinion, to deliver on these, he will need a strong team of highly effective ministers.” Meanwhile Ramesh Mantri, director of investments at White Oak Capital Management, described Mr Modi’s re-elections as a chance 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,” said Mr Mantri. Sukumar Rajah, senior managing director at Franklin Templeton emerging markets equity, said that Mr Modi’s election success could pave the way for a boost in infrastructure spending. “We expect the BJP to work towards its election promises once the dust settles in New Delhi. Modi’s manifesto included a US$1.44trn boost to infrastructure, a $10.5bn cash injection into the farming industry. He pledged to double farmers’ incomes by 2022, in response to growing anger from farmers over low crop prices, which had a detrimental impact. “He also unveiled plans to continue to simplify the Goods and Services Tax, remove certain products from the list of items subject to the higher tax rate of 28%, and to increase investment in infrastructure, which could introduce new jobs. In our view, policies implemented during his last administration are established enough to withstand any potential short-term challenges. We think this election result could help the economy remain on a path of fiscal stability,” said Mr Rajah.

Modi’s Indian election win welcomed by economists and investors

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