The Bharatiya Janata Party (BJP) and its allies emerged victorious in India’s general election 2019. At the time of writing, the BJP had won 302 of the 543 seats being contested, easily securing a majority in the lower house of parliament, Lok Sabha.
The BJP exceeded its performance in 2014, which is impressive as the media and the market expected it to lose 40-50 seats and depend on allies to form a coalition to govern India. Most commentators, however, underestimated the progress that occurred in India under the BJP.
In our view, the BJP win in 2019 is significant for three reasons:
Most commentators failed to notice that the BJP and the Indian bureaucracy almost flawlessly delivered on a number of initiatives that make the life of the poor and vulnerable better. Such initiatives include:
The government delivered these initiatives while maintaining the path of fiscal consolidation. The initiatives of financial inclusion, DBT and rural electrification are positive for economic development over the medium-to-long term.
The BJP successfully cleared many of the infrastructure projects that were initiated by the previous government. It also did well by expediting the construction of infrastructure – for example, the pace of road construction increased to more than 30-40km per day from less than 5-10 km per day in the past. Similarly, significant progress was made in electrification and de-bottlenecking the Indian Railways. The construction momentum of the Dedicated Freight Corridor (DFC) that was conceptualised under the previous government significantly accelerated after 2014 and the first phase of the DFC is close to completion. Several new DFCs are in the feasibility and planning stages.
In addition to the efforts from the BJP at the central-government level, several states under the BJP also stepped up infrastructure development significantly. For instance, the state of Maharashtra, which lagged in infrastructure creation, is seeing a significant increase – including the construction of metro rail, upgrading the existing suburban rail network, building expressways to connect major cities in the state.
The BJP initiated and passed reform in several areas:
The economy moved away from a regime of ad hoc decision making to a rules-based framework that levels the playing field for all businesses. In this process, the old Indian industrial families felt the pain as several are not in a position to compete in a rules-based, open environment and risk losing prized assets. They survived for a long time due to policy arbitrage and the evergreening of loans by banks, which masked their inferior ability to measure business risks. The Reserve Bank of India's (RBI’s) asset-quality review dismantled the evergreening practice and forced some of these companies into the bankruptcy court.
Although this weakened private-sector capital expenditure in the near term, it is positive from a medium-to-long-term perspective as businesses are more likely to operate on a sustainable basis. A lot has been written about the extent of job creation or losses during the last five years. Demonetisation and GST resulted in some losses as the informal, cash-based sectors were hit due to these initiatives. However, the Indian economy still grew by up to 50% on a nominal basis over the past five years, and as an economy becomes more productive, it is not possible to grow at such a pace without creating jobs.
We expect reforms to continue as the government will not likely need much external support from parties outside the alliance led by the BJP. Key initiatives include:
We also expect that the next five years will see an emergence of universal basic income (UBI) for the poor and vulnerable. A UBI with a limited scope was launched last year for small and marginal farmers. In addition, a universal healthcare scheme was also launched last year. We expect these programmes to grow in scope and size at some point. The government spends about $30bn each year on various subsidies and schemes already and a DBT-based UBI is likely to be a better option as it solves the problem of fund leakage.
We believe that manufacturing is also likely to receive a major boost as the economy is sound and provides a foundation for a manufacturing-led economy. We expect a number of large defence contracts to be announced in the BJP’s next term that will likely have significant transfer-of-technology conditions and a requirement for local manufacturing offset. Global defence companies have already set up joint ventures and subsidiaries in India and the initial work has begun. Defence projects have the potential to create a manufacturing ecosystem that will complement the existing automotive, software, chemical and industrial capabilities in the country.
Modi’s victory lifts a cloud of uncertainty for the economy and the market. However, the government has a few immediate challenges to overcome. For instance, resolving the Non-Banking Financial Companies (NBFCs) funding and liquidity issues, public-sector bank consolidation, the continuation of fiscal consolidation and accelerating the pace of economic expansion despite a challenging external environment, particularly given the escalating economic war between the US and China.
A stable and a strong reform-minded government is important and it will be seen as a positive by foreign strategic investors. A number of reforms initiated over the last five years will be institutionalised as it is important for the country to not revert to the old ways of doing business.
In our view, domestic sectors are the most attractive from an investment perspective. Most public-sector banks and NBFCs are out of action, which provides well-run private banks with an opportunity to grow faster. Private banks and insurance companies demonstrate strong earnings visibility even though the economy has not completely recovered from the disruption of GST implementation and the NBFC liquidity crisis. They are experiencing credit growth of over 13% driven by retail customers and a modest recovery in industrial business. Additionally, we expect the private sector capex recovery to be a major theme over the next five years.
