The implications of India’s election: an inside view

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In last year’s turmoil over the US tapering plans, India was labelled as one of the ‘fragile five’ emerging markets.

Now, with the equity market rallying and the country having just completed a general election, Anand Shah, CIO of BNP Paribas Investment Partners (BNPP IP) India in Mumbai, provides a timely inside view on what to expect from the new government, and the implications for investors.

BSE30 India

 How would you summarise the outcome of the election and the economic context in which it took place?

The Bharatiya Janata Party (BJP) and National Democratic Alliance (NDA) coalition, led by Narendra Modi, chief minister of one of India’s most prosperous and progressive states, Gujarat, won 337 out of the 544 seats in the Lower House, giving it the most decisive mandate in 30 years. The election took place as India faced stagflation: annual GDP growth has fallen from a sustained 8%-9% to 4.5% and inflation is around 8%-10%. The recovery since the financial crisis has seen huge fiscal and monetary stimulus, most of it spent on subsidies, entitlements and lower taxes. This has in essence led to a jobless recovery: between 2005 and 2010, India saw a net 1.1% fall in jobs.

What are the new government’s priorities likely to be?

Its immediate priorities will be to control inflation and the fiscal deficit, and to invest in creating jobs. Food-price inflation core to inflation overall – is largely due to distribution-chain bottlenecks, so investment is needed here. Key agricultural policies need changing too. We think the initial target will be to reduce inflation to 6%. The fiscal deficit needs firm management and both Mr Modi and the NDA have good track records on that. Mr Modi should benefit from the previous government having already taken difficult decisions to reduce the deficit and subsidies, so we do not expect the new government to try to quickly kick-start the economy via new monetary and fiscal policies.

In Gujarat, Mr Modi showed he knows that sustained growth is based on job creation. The focus will likely be on developing skills and boosting capital expenditure in labour-intensive industries such as textiles and tourism. In India’s metals industries, for example, where capacity utilisation is not an issue, investment should yield a high return on equity (ROE) and return on investment (ROI), so this could quickly attract much of the capital that India now lacks in this sector. Investment is also needed to support the construction of 100 smart cities, urban transport and the completion of the national gas grid.

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Anand Shah

Chief Investment Officer at BNP Paribas Mutual Fund – India

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