A Landslide Election Brings Hope to India

For the first time in 30 years, India has avoided electing a divided government, giving the Bharatiya Janata Party (BJP) a decisive victory in the parliamentary elections. The landslide results enable the BJP, under the leadership of incoming Prime Minister Narendra Modi, to form a national government on its own without the need to form any coalition. This means that the party can avoid the legacy problem of political paralysis on various policy approvals, which is conducive to carrying out reforms. 


In our view, India’s growth stagflation has come to an end.  We are at the inflexion point for the country’s structural upward trajectory.

Reviving the overall economy
Committed to making India an economic superpower, Mr. Modi’s alliance aims at achieving high single-digit gross domestic product (GDP) growth on a sustainable basis over the next five years, as compared to the current 4.5% GDP growth.1

One of the ways to achieve this is by rebalancing the economy. Currently, two-thirds of the economy is skewed toward service industries, while the remaining is from the manufacturing industry and agriculture. In light of this, the BJP campaigned to diversify the base of economic growth by rebalancing each pillar to one-third each. We believe this diversification can open up new business opportunities over the medium term.

Addressing infrastructure needs
With 1.3 billion people, India has an urgent need for basic infrastructure — 68% of the population still does not have access to safe water, and 34% has no access to electricity.2 Mr. Modi’s campaign called for a “shining India” with nationwide infrastructure and improved road connectivity to various remote places of the country.

In our view, Mr. Modi has a high chance of delivering his commitment, given his track record of improving infrastructure of an urban state. During his 12 years as chief minister for his home state of Gujarat, he was dubbed the “development man,” successfully transforming Gujarat from a less-developed state to one of India’s most prosperous states that now enjoys good transportation and electricity. 

Driving capital expenditure recovery and investments
Looking ahead, we expect Mr. Modi will promote policies to improve business sentiment, thereby lifting corporates’ capital expenditure and incentivizing a revival in both domestic and foreign investments – which have been held off in the recent years due to unclear political direction.

We believe Mr. Modi, as a business-friendly and a strong pragmatic leader, should be able to instill confidence to investors. During his time as chief minister of Gujarat, Mr. Modi demonstrated his ability to woo investments from other states into his state.

Conclusion
The arrival of Mr. Modi’s government has a painted a promising page for India.  With the positive backdrop of a decisive government, we expect corporate earnings and cash flows of Indian companies to enjoy a good pickup thanks to an increase in government infrastructure spending.

Despite the recent strong market performance in India, the market valuation of the MSCI India Index continues to be accommodative, with a trailing price-to-book ratio of 2.9x, in line with the seven-year historical average.

1 Source: National Democratic Alliance party profile
2 Source: 2013 population data sourced from J.P Morgan Research, IMF, as of May 2014. Infrastructure-related data is sourced from CLSA research, as of November 2013.