Modi’s re-election augurs well for reforms
Modi’s re-election augurs well for reforms
Avinash Vazirani and Colin Croft say India offers a compelling choice for long-term investments as Modi stays as the prime minister for another five-year term.
The recent re-election of Prime Minister Narendra Modi, though achieved without an outright majority, has resulted in a coalition government under his leadership. The National Democratic Alliance (NDA), led by the Bharatiya Janata Party (BJP), secured 293 seats, comfortably above the majority mark of 272 seats, despite being 60 seats lower than their 2019 tally.
Coalition Governments: A Historical Norm
Coalition governments have been an integral part of India’s political landscape for nearly four decades. Since 1989, coalition governments have been more the rule than the exception in India. For instance, the Congress-led United Progressive Alliance (UPA) governed from 2004 to 2014 through a coalition, successfully implementing significant economic reforms and maintaining political stability. Similarly, the BJP-led NDA has effectively governed as a coalition since 2014, with the 2014 and 2019 election being an unusual deviation where BJP alone secured a majority.
The precedent for successful coalition governance was firmly established in the early 1990s. Governments led by diverse coalitions have often enacted substantial economic reforms, enhancing India’s global economic standing. Notably, the BJP’s coalition government in 1999 and the Congress-led coalition in 2004 spearheaded reforms that laid the foundation for sustained economic growth. It’s important to note that many of the years of coalition government were accompanied by high rates of economic growth and healthy stock market returns.
The precedent for successful coalition governance was firmly established in the early 1990s. Governments led by diverse coalitions have often enacted substantial economic reforms, enhancing India’s global economic standing. Notably, the BJP’s coalition government in 1999 and the Congress-led coalition in 2004 spearheaded reforms that laid the foundation for sustained economic growth. It’s important to note that many of the years of coalition government were accompanied by high rates of economic growth and healthy stock market returns.
Unprecedented Single-Party Performance in recent times, except their own
The BJP’s performance, securing 240 seats on its own, represents the highest tally for a single party (excluding recent BJP victories) since the sympathy wave for Rajiv Gandhi in 1984 following the assassination of the then Prime Minister Indira Gandhi. This achievement underscores the continued strength of the BJP and Modi’s influence in Indian politics, reaffirming the party’s robust grassroots support and organizational strength. There were clearly anti-incumbency votes in the North of the country, although the vote share of the BJP increased in the South. Clearly, the markets and the psephologists got it wrong by expecting a clear BJP majority, like in 2014 and 2019.
Economic Outlook: Promising Growth and Stability
India’s economy is poised for robust growth, further bolstered by Modi’s re-election. India has just recorded the highest GDP growth rate globally, estimated at 8.2% for the fiscal year 2023-24. This remarkable feat is amid global economic uncertainties and is indicative of India’s strong economic fundamentals and effective policy measures.
This growth is complemented by the anticipation of a strong monsoon season, which promises to rejuvenate rural incomes and spur increased consumption. The Indian Meteorological Department (IMD) has forecasted a favourable monsoon for 2024, a significant improvement after several years of below-average rainfall. Good monsoons are crucial for the agricultural sector, which employs a significant portion of the population and drives rural demand.
Additionally, Indian companies have reported record profits for the financial year ending March 31, 2024. The combined net profit of Nifty 50 companies rose by 18% year-on-year, reflecting strong corporate performance. Analysts have subsequently revised the Earnings Per Share (EPS) growth rates for FY25 and FY26 upwards, indicating sustained investor confidence and a positive outlook for corporate profitability. Our investee companies have, on average, have had a significantly higher earnings growth than that of the index.
This growth is complemented by the anticipation of a strong monsoon season, which promises to rejuvenate rural incomes and spur increased consumption. The Indian Meteorological Department (IMD) has forecasted a favourable monsoon for 2024, a significant improvement after several years of below-average rainfall. Good monsoons are crucial for the agricultural sector, which employs a significant portion of the population and drives rural demand.
Additionally, Indian companies have reported record profits for the financial year ending March 31, 2024. The combined net profit of Nifty 50 companies rose by 18% year-on-year, reflecting strong corporate performance. Analysts have subsequently revised the Earnings Per Share (EPS) growth rates for FY25 and FY26 upwards, indicating sustained investor confidence and a positive outlook for corporate profitability. Our investee companies have, on average, have had a significantly higher earnings growth than that of the index.
Strategic Reforms and Continued Prosperity and No U-turns
The Modi-led government is expected to continue implementing strategic reforms that have been pivotal in driving India’s economic ascent. Key reforms in infrastructure development, digital economy, and fiscal consolidation have created a conducive environment for growth. For example, the government’s focus on public capital spending, such as the National Infrastructure Pipeline (NIP), has significantly boosted infrastructure development. No major slowdowns in infrastructure or defence spending are anticipated, although new political reforms may face delays. One of the allies will be the Telugu Desam Party, which is headed by N. Chandrababu Naidu. Naidu is known for his strong reform credentials and is largely credited for transforming Hyderabad into a technological hub. Companies such as Microsoft and Google have big offices in the city now.
Investment Opportunities and Market Sentiments
The positive economic indicators and a stable government bode well for investors. The Reserve Bank of India (RBI) has played a crucial role in maintaining economic stability by keeping the policy repo rate steady at 6.5%, ensuring ample liquidity in the market. Furthermore, the RBI’s efforts in building substantial foreign exchange reserves, currently standing at approximately $640 billion, provide a buffer against global economic volatility.
The government’s fiscal prudence and emphasis on structural reforms further enhance the attractiveness of the Indian market for both domestic and foreign investors. The fiscal deficit for FY24 came in lower at 5.6% of GDP, better than the government’s estimate, reflecting strong fiscal management. Before the election results were announced, S&P Global Ratings last week raised India’s sovereign rating outlook to `positive’ from `stable’ while retaining its `BBB-‘ rating.
The government’s fiscal prudence and emphasis on structural reforms further enhance the attractiveness of the Indian market for both domestic and foreign investors. The fiscal deficit for FY24 came in lower at 5.6% of GDP, better than the government’s estimate, reflecting strong fiscal management. Before the election results were announced, S&P Global Ratings last week raised India’s sovereign rating outlook to `positive’ from `stable’ while retaining its `BBB-‘ rating.
Outlook remains positive
Prime Minister Modi’s re-election, albeit through a coalition, should ensure continued stability and economic prosperity for India. With a strong foundation of coalition governance and a commitment to economic reforms, India is set to remain a lucrative destination for investors over the long term. The positive economic outlook, bolstered by a promising monsoon and robust corporate performance, reinforces India’s position as a global growth leader.
In our view, India is likely to continue the remarkable progress made in recent years under a Modi coalition government. Investors can look forward to a period of stability and sustained growth, ensuring that India remains a compelling choice for long-term investments.
It’s possible that markets may fluctuate in both directions over the next few weeks as the new cabinet takes shape, and the budget is unveiled in early July. However, once the dust has settled, we believe focus will return to the fundamentals – which remain extremely strong.
In our view, India is likely to continue the remarkable progress made in recent years under a Modi coalition government. Investors can look forward to a period of stability and sustained growth, ensuring that India remains a compelling choice for long-term investments.
It’s possible that markets may fluctuate in both directions over the next few weeks as the new cabinet takes shape, and the budget is unveiled in early July. However, once the dust has settled, we believe focus will return to the fundamentals – which remain extremely strong.
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