Our pre-election commentary, in which we gave only a 5% chance of an outright Bharatiya Janata Party (BJP) majority, proved woefully cautious. In the end, Modi’s BJP blew past their 2014 tally of 282 seats, winning 303 at the final count. When you include his allies in the National Democratic Alliance (NDA), he won 353 seats, 65% of the 543 seats available. The mid-term resurgence of Congress petered out to a meagre 52 seats, slightly more than their showing in 2014, but another sign of how the Indian public has fallen out of love with the Gandhi dynasty. Even efforts by some local parties to combine against Modi failed spectacularly, such as in India’s largest state, Uttar Pradesh, where the BJP swept 62 of the 80 seats, and increased their vote share from 42% to 50%.
The market reaction was, in the end, more subdued than we might have predicted given this result, but there are a couple of reasons for this. Firstly, the market had performed relatively well leading up to the event, as the polls, correctly for a change, had forecast a solid Modi victory. Secondly, the result came during a month of relative turmoil for emerging markets, with the China-US trade war back on and many markets falling back sharply. India’s modest gains in the month of May stand out even more starkly against this backdrop. Finally, economic numbers of late have softened, and there remain plenty of challenges ahead for the new government in their efforts to reaccelerate growth.
So, what do we have to look forward to in the coming five years?
A core platform of Modi’s government has been “fiscal responsibility” and the “control of inflation” and more of the same is likely. This was reflected in a general sigh of relief from the bond market after the election result. Further fine tuning of goods and services tax rates and a tightening of enforcement are likely to help. The rural agenda was a hot topic in the election, and while there will be some inevitable sops, such as better pension access and debt forgiveness, the BJP track record on this is to focus more on productivity gains to improve incomes, not just handouts. Aggressive targets for infrastructure and housing remain.
Perhaps the most important targets are labour reforms along with upgrading skill levels and improving the ease of doing business. India is very well positioned to gain ground from the ongoing China fallout, given both the availability of labour and its huge and growing domestic market, but the whole process needs to get much easier for potential investors. The opportunity is huge, as well as potentially answering the key challenge facing India: namely the gainful employment of their massive young population, ever fewer of whom will be farmers. No one is more aware of this fact than Mr. Modi.
As a result of all this it is possible to envisage a virtuous cycle emerging over the next few years in India. Stable progressive government, lower inflation, lower interest rates, an investment upturn and potentially lower oil prices could be a heady mix. We remain very comfortable with one quarter of our portfolio in India, and suspect this may rise further.
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