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The world’s biggest election began today in India. About 970 million people are eligible to elect 543 members to the Lok Sabha, the lower house of parliament, in the six-week-long election. The election features six national parties, 57 state parties, and 2,597 smaller parties. However, the primary contest is between the two major parties: the ruling Bharatiya Janata Party (BJP) and the opposition Indian National Congress (INC).
Prime Minister Narendra Modi of BJP seeks a third consecutive term, and opinion polls suggest that his party will take a third straight victory.
A party or coalition needs 272 of the 543 seats in the Lok Sabha to form the government. In the last elections in 2019, the BJP alone won 303 seats, forming the National Democratic Alliance (NDA) with a total of 350 seats. This year, Modi has set the ambitious “above 400” goal.
“A combination of factors is driving investor confidence in a BJP win,” points out Franklin Templeton. The party is well organised and has a meritocracy record in selecting candidates. This “creates an inclusive environment and reduces the risk of internal splintering”, as per the asset manager.
But one of the main factors might be the solid economic record. Since Modi assumed power in 2014, India has achieved a 7% compound annual growth rate in dollar terms, pointed out brokerage house Jefferies, and has gone from being the eighth largest economy in the world to the fifth largest.
“India’s rising status on the world stage is a big win for Modi in the eyes of many Indian voters,” says Milan Vaishnav, director of the South Asia Program at international affairs think tank Carnegie Endowment for International Peace.
However, some analysts are not that optimistic that the BJP will reach the ambitious goals set by Modi.
“While it looks inevitable Modi will remain in power, there is a goldilocks scenario to this election,” says Varun Laijawalla, Portfolio Manager at Ninety One. “That ‘just right’ scenario in our view, is that he wins, but not with such an overwhelming majority that he can essentially do what he wants. Free reign leads to hubris and hubris leads to poor decision making, which can, in the most extreme cases, impact equity market valuations.”
What to expect from Modi 3.0?
If the BJP wins the general election, market observers do not expect significant changes in government policies.
“Modi has set out his vision for achieving developed market status by 2047 and will focus on the continued implementation of policies to achieve that goal,” says Stephen Dover, Head of the Franklin Templeton Institute.
Dover names the goods and services tax reform in 2017, which has doubled collections to $180 bn. “With rising tax revenues, the government has been able to support green investments and amplify its focus on investment in information technology hardware. Recently, there has been a focus on investment in semiconductors, as policymakers seek to increase domestic supply and diversify the technology sectors’ reliance on software services,” Dover explains.
For investors, the India election phase could also generate additional opportunities. “While investors usually approach crucial elections with a sense of trepidation, we believe the favourable opinion polls leading up the national polls should mitigate concerns over political stability and policy stability,” said Nilang Mehta, Portfolio manager, Indian equity strategy
JPMorgan Private Bank points out that election-induced short-term volatility could provide an opportunity to “buy the dip”.
“We remain convinced of the structural growth opportunity in Indian equities,” Alex Wolf, Head of Investment Strategy for Asia at JPMorgan Private Bank, wrote in an insight. “Long-term investors could be at least ‘neutral’ relative to the benchmark, and a strategic ‘overweight’ is warranted in our view.”
