After months on the campaign trail, Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) emerged victorious, to secure his second term as prime minister. We expect positive market reaction to be mostly limited, as the BJP victory seemed largely priced in.
Although we believe some obstacles remain on the pathway to the economic reforms Modi has promised, we think he’ll push for policy continuity with his initiatives. Modi’s manifesto included a $1.44 trillion boost to infrastructure, and a $10.5 billion 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 per cent, 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 growth.
Infrastructure push to continue
Many of the initiatives are at the state level, where we’ve seen resources drive Modi’s ambitious infrastructure programme, particularly for transport such as roads, railways, waterways and airports. The 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 utilisation, which indicates demand in the economy.
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.
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 property 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.
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.
We continue to see structural opportunities 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.
We think the reach and size of these private players could help with company margins and boost these particular domestic stocks. As Modi enters another term, we’d expect to see a continuation of India’s development as one of the world’s fastest-growing emerging market economies.
Sukumar Rajah is Senior Managing Director and Director of Portfolio Management, Franklin Templeton Emerging Markets Equity.