India: All eyes on Modi’s prospects amid growth optimism
Avinash Vazirani and Colin Croft say investors will focus on the outcome of the upcoming national election and what that could mean for government policies amid growth optimism.
Will the election lead to continuity or change in policies? That’s the question that’s uppermost in the minds of most investors. Following a resounding victory in some state elections towards the end of 2023, Modi’s supporters believe he has gained validation for his pro-growth policies. A booming economy, a rapidly digitalising economy, a unified tax regime providing fillip to revenue generation and fiscal consolidation, softening core inflation and a stock market that recently hit an all-time high (US being the only other major economy to achieve this) in dollar terms have all raised India’s profile globally.
Structural factors back growth
The government’s renewed focus on manufacturing, a boost in capital spending by both the private and public sector, and a global move to diversify away from China following the supply-chain bottlenecks witnessed during the Covid years are among the factors that could sustain the growth momentum. The government’s $26 billion Production Linked Incentive scheme is aimed at spurring the manufacturing sector, with an aim to move up the value chain.
The International Monetary Fund forecasts that the Indian economy, which is now the fifth largest, will become the third largest in the world by 2027. We believe that India can sustain a robust pace of growth in the coming years, supported by positive structural factors and policies.
Stock gains driven by domestic savings
One important aspect distinguishing India from the US and Europe is the broad-based rise in stocks across sectors and categories. This stands in contrast to the US, which is dominated by the “magnificent seven’’ technology companies, and Europe, where “GRANOLAS’’ are all the rage.
We believe there are good opportunities in a wide range of sectors including banks, insurance companies, health sector, pharmaceutical companies, and infrastructure such as ports and airports. If we need to mention a risk to our overall positive view about India’s prospects that would be geopolitics. We believe the volatile geopolitical environment could pose a risk to rapid growth if that causes a spike in oil prices given the country’s heavy reliance on energy imports. Going back to the political scene, the election fever has already gripped India and we expect the current gains on the growth front will be secured further in the medium term once the polling dust settles by summer.
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