Shashank Savla

The world’s largest democratic exercise - what it means for investors

Shashank Savla

Indian election

The upcoming Indian general elections will be the largest democratic exercise ever undertaken, with about 900 million people eligible to vote and 600 million expected to participate. Nearly four million electronic voting machines will be used in more than a million polling stations. Here I take a look at the key issues for investors ahead of the elections, which are scheduled to be held in seven phases starting today with results to be declared on 23 May.

The previous election in May 2014 saw the Bharatiya Janata Party (BJP) win 282 out of the 543 seats on the back of Narendra Modi’s popularity and promise of a corruption-free government and a reformist agenda. It was the first time in 30 years that a single party had managed to achieve a majority on its own and led to expectations of significant reforms and pro-growth policies being implemented.

PM Modi’s record over the past five years has been mostly positive. There have been a couple of setbacks – Modi partially reversed India’s oil deregulation and is increasingly vocal about policy disagreements with the central bank – but not too many.

The main issue is that while many of Modi’s measures will produce benefits, most of these will not feed through for some time. For example, significant reforms such as the Goods and Services Tax, setting up of a Monetary Policy Committee, Insolvency and Bankruptcy Code, and Real Estate Regulation Act should provide long-term benefits, but haven’t provided an immediate boost to job creation. It is estimated that more than a million people enter the workforce every month, making employment generation a key political issue. Likewise, little progress has been made to reform land and labour laws, which, although admittedly on politically treacherous territory, could significantly improve India’s potential growth rate and attractiveness as a foreign investment destination.

Lower inflation has allowed the central bank to cut interest rates – a significant boost – but the weaker prices are largely due to falling food prices which have severely dented farm incomes. Two-thirds of India’s population still live in rural areas where agriculture is the main source of income. In addition, India’s GDP growth has slowed (in line with the global economy) from about 8% in the second quarter to 6.5% in the fourth quarter of 2018.

This combination of slower growth, lack of job creation and rising farmer distress has led to a slight dip in Modi’s popularity over the past year, though he still dominates the popularity rankings. To combat this, the government has recently resorted to some populist policies such as a double digit increase in minimum support prices for agricultural produce and a special farm package. Whether these measures are enough to help the BJP retain power is difficult to predict. Modi may also benefit from rising tensions and border skirmishes with Pakistan this year, which have boosted his image as a strong leader.

Opinion polls are predicting either a hung parliament or a slender majority for the BJP-led National Democratic Alliance (NDA) over the alliance led by Rahul Gandhi’s Indian National Congress. The key will be the result in India’s most populous state, Uttar Pradesh, which sends the highest number of members to Parliament. There, the BJP managed a landslide victory in 2014, winning 71 out of 80 seats. However, this time around it could lose half of its seats to two local parties, Samajwadi Party and Bahujan Samaj Party, which have formed an alliance despite their historical arch rivalry.

A loss for the BJP and Modi at the national elections would be very negative for Indian equity markets as this would result in a weak coalition government unable to carry forward needed reforms or could even see a reversal of the reforms undertaken during the past five years. Uncertainty over the election outcome may have contributed to Indian equities underperformed so far this year, with the MSCI India Index returned 7.4% in US dollar terms so far in 2019, compared with 14.6% for the MSCI Asia Pacific ex-Japan Index.

Our view is that Indian equity valuations still seem relatively expensive at a forward price/earnings ratio of 18.1x, which compares with 13.5x for the wider Asian region and the country’s historic average of 14.8x. We maintain our underweight position in India and see better opportunities in the rest of the Asian region.

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Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in Funds managed by the Asia team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation. 


The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Thursday, April 11, 2019, 9:41 AM