India’s incumbent government wins second election mandate

India's 2019 general election has handed a majority to the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA),¹ and a second term in office to Prime Minister Narendra Modi as per the results on counting day. How should investors interpret this outcome?

Election results: a positive surprise for the market

On May 24,  2019, one day after counting began for India’s general election, the BJP won 292 seats and was leading in another 11 seats, bringing the party’s potential tally to 303 out of a possible 542 seats in the Indian Parliament (272 seats are required for a simple majority). In our view, markets had believed that the BJP would win around 250 seats, and a coalition would be required to govern. While it could still be a BJP-led NDA coming to power, the BJP’s second successive majority on its own accord is a positive surprise. 

Growth and capital are vital for India’s long-term success

We expect Indian equity, bond, and currency markets to react positively over the next three months. First, the stronger-than-expected election mandate for the NDA reduces the pressure on the government to offer populist measures and provides a mandate to maintain fiscal discipline. On the monetary front, fiscal discipline and benign inflation mean that the Reserve Bank of India should have further room for monetary accommodation. Finally, the incoming government can build on its foundation of economic reforms like formalization and continue with public investment in infrastructure and rural areas. From a regional perspective, Indian assets could potentially be helped by the U.S.-China trade dispute, as the country’s GDP exposure to merchandise exports is far lower than other regional markets.²

Over the next 6 to 12 months, we will need to watch the government’s policy agenda closely. We believe there are plenty of opportunities to lift India’s growth rate, as shared in our previous commentary “India’s unique opportunity to lift growth.” We believe the government needs to build capital in order to promote its growth agenda through the three “R’s”—Recycle, Rebuild and Reinvest.

  • Recycle—The government and state-owned enterprises (SOEs) should continue with much-needed investment that should get funded by the sale of the state’s stake in non-strategic businesses. 
  • Rebuild—Investment derived from this recycling should help to rebuild incomes and savings, which, in turn, will boost savings availability for the private sector, where capacity utilization is inching up. A return of private capex is also favorable for job creation. 
  • Reinvest—Due to the U.S.-China trade war and China's move to a more consumer-focused, high-tech economy, there could be many new opportunities in manufacturing, especially if the government creates a business-friendly environment that encourages overseas firms to invest in India.

Overall, we believe India’s general election results should reassure investors that the country is on a policy path of continuity. The incoming government has a unique opportunity to build on the foundation of economic formalization and lift growth rates.

1 Election Commission of India, as of 1pm IST, May 24, 2019. 2 World Bank, May 2019. In 2017, India’s merchandise exports as a percentage to GDP is 11.3%, compared to China’s 18.5% and Indonesia’s 16.6%.  

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Rana Gupta

Rana Gupta, 

Senior Portfolio Manager, Asia ex-Japan Equity

Manulife Investment Management

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