Among the many factors we consider, political instability is a risk that needs to be borne in mind when investing in emerging markets. In this respect, last weekend’s state election results in India have reinforced our positive outlook for the country, where, along with favourable economic fundamentals and demographics, the stabilising of the political landscape offers a compelling investment opportunity.
My intention in this weekly comment is not to go over the macro case for the region, nor the economic tailwinds that should drive economic growth and the future performance of the Indian stock market; our Group MD and CIO, Scott Campbell, quite aptly achieved this in a previous weekly comment entitled ‘Indian Investment Opportunities’. Instead, my intention is to outline the implications of the election result and what that may signal for the region going forward.
In a period where global political uncertainty has thrown up numerous election/referendum results that have surprised the market (Brexit, Donald Trump sweeping to power in the US, Italy’s constitutional referendum), the results of the Indian state elections surprised various commentators, not necessarily in terms of the overall outcome, but more just how convincing Prime Minister Modi’s BJP’s victory was. In Uttar Pradesh (UP), for example, India’s most populous state, home to some 220 million people, the BJP won 312 out of the 403 seats, quite meaningfully above expectations.
The following generally focuses on the result in UP, as it has a much greater effect on the make-up of the government and of parliament – of the remaining four the BJP also convincingly won Uttarakhand and hopes to form a government in Manipur, though, it did lose in Punjab and Goa.
What are the potential implications of the result and how may this be positive for the Indian economy?
Firstly, what the results demonstrate is the continued backing and popularity of Modi and the BJP. The UP region is predominantly populated by India’s poorest people; as such, the result indicates support across social classes. Additionally, the region has historically voted along religious lines, which suggests Muslims have turned out in force to back Modi. These factors, along with support from female and younger voters, suggest that Modi has widened his voter base since ascending to power in 2014. Furthermore, the result has both vindicated and endorsed his move on demonetisation (the removal from circulation of high denomination bank notes, designed to stamp out corruption, increase tax receipts and create greater transparency in business), at the time a policy that could have alienated voters.
Secondly, and arguably more importantly in regards to economic reform, the increase in the number of seats the BJP has in the upper house is also significant. Currently, the BJP lacks the two-thirds majority in the Indian parliament’s upper house – the ‘Rajya Sabha’ – to ensure the passage of legal and economic reforms. As a result, a number of bills in respects to land and labour, much to the disappointment of both the government and international investors, have failed. Now, however, with the emphatic victory in UP, as the largest populated state, and elsewhere, not only means that it has the largest proportion of seats in the upper house, but also that this crucial majority may soon be in place.
With the support and popularity of the current administration and no major credible opponent, it would seem that Mr Modi’s re-election and a BJP majority in 2019 is a strong likelihood. If they can also secure the required majority in the upper house, the country will be led by a pro-growth, pro-business administration taking them through to the next general election in 2024.
As we have seen recently, however, election results have surprised in the past!!India's Politics Under the Lens