In Brief
- Indian Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP) have swept back to power in India with an absolute majority in the lower house.
- The win will help market sentiment by providing some clarity on continuation of policy and removal of election uncertainty.
- Focus on India’s fundamentals will resume and the country still faces a number of challenges. The BJP win should be positive for India’s outlook. The political capital gained and stability achieved will mean that government policy can focus on tackling growth issues again.
India’s ruling National Democratic Alliance (NDA), led by incumbent Narendra Modi and his BJP, has returned to power with a landslide win in a massive election involving over 900 million voters and split across seven phases between April 11 and May 19.
As of writing, the NDA appears to be on track to claim 352 of the 543 seats in the Lok Sabha, the lower house of India’s parliament. Their main opposition, the United Progressive Alliance, led by Rahul Gandhi and the Indian National Congress, appears set to clinch only around 96 seats.
Indian markets initially reacted positively, with the MSCI India index rising around 3% on exit poll results, before steadying when the final outcome became clearer. An NDA win was seen as the base case scenario by most surveys, but the scale of the win was unexpected. BJP’s poor showings in local state elections last year led some to forecast the political party might be returned with a weaker mandate, and would have to rely more on their coalition partners. This clear-cut win will help market sentiment by providing some clarity on continuation of policy and removal of election uncertainty. The strong public support for the BJP also suggests any previous mishaps or mistakes have been forgiven by voters.
Number of seats in the Lok Sabha
EXHIBIT 1: Election results, 2014 (Left) vs. 2019 (Right)
Number of Seats
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Source: Election Commission of India, J.P. Morgan Asset Management. Data are as of May 24, 2019.
Like so many political events worldwide, post-election euphoria may soon fade leaving markets to return to looking at fundamentals. Government policy can be key driver of the economy and a strong majority in parliament should mean that decisive reforms can be pushed through. But this is similar to five years ago when Prime Minister Modi first came to power with a sweeping majority.
While there is still optimism over the reforms needed to push investment, ease of doing business, infrastructure buildup and social welfare, India still faces a number of challenges. Gross domestic product (GDP) growth has slowed to below 7%; the fiscal deficit has improved but remains above 3% of GDP; the current account deficit has widened to 2.5% of GDP, exacerbated by an over-reliance on oil imports; and the financial system is still haunted by a large amount of non-performing loans and the stability of non-bank lending institutions remains in question.
The track record for Modi’s government over the previous five-year term has been mixed, even with the extremely strong public mandate received. There have been positives such as improvements in infrastructure and support for farmers. Other highly-touted government initiatives, such as the Goods and Services Tax implementation and demonetization have not panned out as smoothly or benefitted the economy as hoped. This strong mandate allows the BJP-led government to try again at tackling these issues, and public support may mean the government will not face as much populist pressure for more handouts.
Investment Implications
The BJP win should be positive for India’s outlook. The political capital gained and stability achieved will mean that government policy can focus on tackling growth issues again. Significant uncertainty has been removed. We are still positive on India’s long-term growth story due to its strong demographic advantage and developing urbanization story compared to other countries. India remains a fundamentally-attractive market in the long run. Amid a time of escalating China-U.S. trade tensions, India is also away from the firing line, making it somewhat insulated from the trade conflict impact. However, valuations in India indicate the market is not cheap. Current Price-to-earnings ratios are at 19.0x, above the 15-year average of 16.1x. India’s corporate earnings growth has also been flat. Alongside a slowing economy, we may wish to wait to buy Indian equities until stronger reforms or policy news emerge, such as at the budget announcement in July, or when earnings improve.
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