India: What its general election means for investors

April 24, 2019 17:18
India, the world’s most populous democracy, is in the midst of a month-long noisy and colorful general election. Photo: Reuters

India's general election is shaping up to be a vote on whether the right-leaning Bharatiya Janata Party (BJP), under the leadership of Prime Minister Narendra Modi, will stay on in power, and if so, the extent of its power as determined by the seats it wins in parliament. For reference, India operates a bicameral parliamentary system with the lower house – Lok Sabha – elected every five years. The party winning the Lok Sabha election will form the government. If no single party bags a majority on its own, the government will be formed by coalitions built around the dominant parties.

In the recent past, Indian elections have seen the BJP beating the left-leaning Congress Party. In previous decades, the Congress Party was the dominant player in Indian politics. This year, the Lok Sabha election started in early April and will last into early May. Despite a slow start, the BJP is now widely expected to win again. While there are uncertainties around the number of seats the party may win, most analysts are expecting a smaller victory than the sweeping election that the BJP won in 2014, when the party received a clear majority, winning 282 out of the 543 seats.

The strength of the government will have some bearing on the reform process at the margin. A weak coalition government would have a harder time to push through difficult reforms, but the impact on the country’s economic life should be minimal over the medium term at least. The stock market tends to get excited or depressed by political developments, but the reality is that India’s growth is driven by its large, diverse and dynamic private sector. The businesses we invested in have all been producing solid growth, both during the BJP’s recent term, as well as the earlier years when the Congress Party was in power.

Even in the unlikely case that the BJP loses the election and the opposition forms a coalition government led by the Congress Party, we do not foresee sustained damage to the stock market. The two parties have broadly similar policies towards the economy. Key reforms pushed through by the BJP, such as the Goods and Services Tax (GST) and the Bankruptcy Law, should remain even if there is a change in government.

In fact, it was the Congress Party that initially put forward the GST, although it was the BJP that pushed it through under the deft hand of Modi. India still has many bottlenecks, and reforms are needed – something both parties recognize. Furthermore, India has strong institutions that provide checks and balances in the system. Thus, we do not see the rise of the middle class – the structural story behind India’s growth – getting sidetracked by the election results.

Upcoming elections aside, India is among the stronger developing countries and also quite solid in the global context. The country has robust and sustainable growth, and not a lot of foreign debt – its debt profile helped it to avoid the concerns impacting other emerging markets when the US dollar strengthened. The economy has been running twin deficits, but both are manageable in size. India is vulnerable to a violent spike in the price of oil, but the current levels will not lead to significant damage to the current account balance or the government budget.

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Portfolio Manager at Vontobel Asset Management