With the results of the world's largest election all but confirmed, Sukumar Rajah explains how the Bharatiya Janata Party's (BJP) stunning victory in the Indian elections could pave the way for a further boost in infrastructure spending, and assesses the likely consequences for the wider economy. The potential is enormous, with GDP growth already averaging 7% over the past 10 years.
After months on the campaign trail, Prime Minister Narendra Modi's BJP has emerged victorious from the country's general election to secure his second term as prime minister. Once again, the BJP secured an outright majority in India's parliament.
Market reaction is likely to be mostly limited, as a BJP victory of sorts seemed largely priced in. Although some obstacles remain on the pathway to the economic reforms Modi has promised, he is most likely to push for policy continuity with his initiatives.
Prime Minister Narendra Modi’s BJP has emerged victorious from the country’s general election to secure his second term as prime minister. Once again, the BJP secured an outright majority in India’s parliament."
The BJP is likely to work towards its election promises once the dust settles in New Delhi. Modi's manifesto included a $1.44trn boost to infrastructure and 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 (GST), 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.
Ignore the election noise
Investors should focus on fundamentals and improving earnings — elements that lead us to be optimistic about India's long-term prospects.
A global slowdown in growth could affect aspects of the Indian economy that are more dependent on exports. That being said, rising domestic consumption has tilted India's economy to be less reliant on the export sector. We think it's likely India will be less vulnerable to adverse global factors.
Fundamentals such as favourable demographics, infrastructure investment, urban consumption growth and increasing income levels all continue to drive Indian growth.
Many of the policies Modi put in place since he came to power in 2014 have underpinned India's economic growth, and this infrastructure drive can be expected to continue. Many of the initiatives are at the state level, where we've seen resources drive Modi's ambitious infrastructure program, particularly for transport such as roads, railways, waterways and airports.
Modi's infrastructure push to improve water management will also provide a critical step in developing several cities. It involves installing infrastructure that can create hydropower from large dams and provide reliable irrigation for land.
We also see signs that could lead to an increase in corporate investment through rising capacity utilization, which indicates demand in the economy. Higher capacity typically leads to company expansions to meet increasing demand.
An increasing number of foreign companies are either looking to, or have increased, their manufacturing capabilities in India. This is partially as a result of Modi's "Make in India" initiative, but also a way to diversify supply chains away from trade concerns over Chinese-manufactured products. More demand for loans should bolster some banks, particularly as the financial services sector is recovering from a period of bad loans and excessive leverage.
Supportive environment for Indian equities
Over the last few years, we've seen a structural shift in how households view savings and investment. Many have been moving away from reliance on physical assets such as gold and properly alone.
We've seen more inflows into domestic equities as a direct reflection of this shift. We don't expect this to continue at a rapid pace, but think more individuals will continue to embrace assets outside of gold and real estate as we see more education about finance and investing.
In addition, a growing middle-class population has more disposable income, and there is greater access to financial products. We think the financialization of savings could foster a supportive environment for domestic Indian equities.
Structural opportunities continue to exist beyond consumption growth and infrastructure upgrades. A shake-up in major sectors such as telecommunications after a mass consolidation left smaller companies with no choice but to either merge or exit the industry. The same has also happened with major cement companies, creating just a handful of large players in the market. The reach and size of these private players could help with company margins and boost these particular domestic stocks.
Over the last five years, Modi has transformed much of India's economic landscape. As he embarks on a second term, there is likely to be a continuation of India's development as one of the world's fastest-growing emerging-market economies.
Sukumar Rajah is senior managing director at Franklin Templeton Emerging Markets Equity. Subscribe to International Investment's free, twice-daily, newsletter