Market volatility seesawed as it became clear that the ruling BJP party won the Indian elections but lost its outright majority. Nevertheless, we expect the incoming coalition to keep the investment-led agenda in place, maintain macroeconomic stability as it endeavours to double the size of the economy by turn of the decade.
Despite its weaker-than-expected showing, the Bharatiya Janata (BJP) looks set to retain power for a third consecutive term as part of the Natonal Democratic Alliance (NDA), an alliance of likeminded parties that fought the election alongside the BJP. Narendra Modi is expected to become prime minister again.
Continuity expected
In spite of the NDA’s slim majority in parliament, we expect the new government to continue with its investment-led economic agenda. It could tweak its priorities to support rural consumption. Over the next five years, we could see a greater focus on area such as:
- Macroeconomic stability with strong economic growth, inflation under control and large foreign exchange reserves; the government will likely stick to fiscal consolidation
- Achieving the USD 7.0 trillion target forthe size of the economy by the turn of the decade; this would make India the third largest economy in the world, after the US and China
- Manufacturing and production-linked incentives to promote employment and reduce imports from China
- Integrated planning of roads, railways, airports, ‘smart cities’, etc. to create a modern economy, with housing for the population of 1.4 billion
- Energy transition – moving away from fossil fuels to renewables to reduce India’s dependence on oil and coal imports. The government is likely to double down on increasing fuel efficiency and investing in alternative energy.
On the flip side, more contentious plans such as land and farm reforms could become harder to push through as the coalition lacks the parliamentary support and national consensus on such polices.
Market swings
Indian equity markets witnessed significant volatility earlier this week after it became clear that the expected clear margin of victory for Modi and his NDA alliance would not materialise. Despite the final result coming in below initial expectations, the NDA was able to hold on to the reins and political uncertainty receded fast.
Despite this volatility, we believe the medium to long-term growth outlook for Indian equities is unchanged. Political continuity should preserve policies focused to economic growth, allowing corporate earnings to grow robustly. Market support should also continue to come from a growing domestic equity savings pool, favourable demographics, digitalisation, and a budding startup culture.
Our Indian equity strategy was well positioned for the event. Accordingly, we don’t foresee any major changes given our optimistic outlook. We take the view that Indian equities stand to earn best-in-class returns over the medium to long term.
