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Modi’s victory: a mandate for further Indian economic reform

Narendra Modi has secured a second consecutive term as India’s Prime Minister in a decisive election victory. We assess the progress made on economic reforms under his leadership, and what work remains to be done to continue the positive momentum.

Key points

  • The Bharatiya Janata Party claimed a landslide election victory due to the progress it achieved in social and economic reforms, from the expansion of electricity infrastructure to introducing a standardised Goods and Services Tax, and in creating infrastructure.
  • More work is required to further India’s economic development, with initiatives targeting the labour market, farming sector, tax system and national institutions.
  • A stable and reform-minded government will be seen as a positive by the market and foreign strategic investors. We see investment opportunities in well-run private banks.

Decisive win

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:

  • It is the first time in India's post-independence history that the BJP has won two consecutive elections. We remember the 1990s, when the BJP struggled to win the elections and were voted out in 2004 despite pursuing a number of reforms and focusing on developing a lot of infrastructure. This was primarily due to the fact that the benefits were not immediately apparent. This time around, the BJP in 2014 did not repeat the mistake.
  • Until now, no national party had won a decisive mandate for a second consecutive term from the electorate, achieving a majority. The voter turnout is estimated to be the highest in history, with an especially strong showing among young people and women. The country sees the BJP and especially its leader, Prime Minister Narendra Modi, as being capable of solving the economic and national problems.
  • The BJP has finally managed to make inroads in states where the party did not have much presence or popularity. These include states in the east and a few in the south. This is significant as it makes the BJP a true pan-India party. It also means that it governs the majority of the states, and centre-state co-ordination is very important for enacting reforms.

Why did the BJP win?

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:

  • Universal access to bank accounts with life insurance, which helps eliminate the informal sources of finance that are exploitative
  • Direct Benefit Transfer (DBT), a mechanism enabling subsidies to be paid directly into recipients’ bank accounts, eliminates middlemen and ensures that money reaches the actual beneficiaries
  • Providing cooking gas for poor households, which helps replace wood fires and makes a huge difference in the lives of women and families
  • Sanitation facilities for poor households and villages, helping to prevent the spread of harmful diseases
  • Rural electrification: the government managed to electrify all villages in the country and make progress on full electrification among households

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:

  • Liberalising the foreign investment regime by opening up most sectors to foreign direct investors
  • Introducing a transparent and fair process for allocating scarce natural resources in contrast to the ad hoc and opaque processes of the past
  • Introduction of the Goods and Services Tax (GST), which has unified the previously fragmented state-based taxation markets and eliminated the cascading impact of multiple indirect taxes
  • Introduction of the Real Estate Regulatory Act, which, for the first time shifted bargaining power in the property industry from developers to buyers
  • Introduction of measures to improve tax compliance through demonetisation and data analytics. This resulted in an increase in the level of compliance and double-digit growth in direct tax collections
  • Introduction of the Insolvency and Bankruptcy Code, allowing for an orderly and timely resolution of bad loans

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.

What happens next?

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:

  • Labour reform: most of the groundwork is complete and we expect the government to begin implementing the reform in the next term
  • Farm sector reform: this is an Achilles heel for the Indian economy, as 60% of the population depends on the farming sector, which is not profitable and therefore drags on national income. A comprehensive farming-sector reform is expected. This would also include a focus on urbanisation, housing and e-agri markets so that surplus labour shifts from farming and the primary producers receive better value
  • Institutional reform: most developed economies have strong institutions that are independent but responsible to the country for their actions. In India, several world-class institutions exist but, over time, have become detached from the reality on the ground and are not accountable for their actions. We expect several institutions to be reformed over the next few years, with the RBI and the Judiciary being prime candidates. The process of reforming the RBI is already underway, and the need for a stronger judiciary system is evident in the roughly 33m cases stuck in the system
  • GST 2.0: the GST regime started in 2017 and the system is stable. However, it is not perfect and we expect GST 2.0 to be developed at some point. This would include a further rationalisation of the GST rate structure and the possibility that the GST council will retain only two rates, 12% and 18%, under which all goods and services will be taxed. This will further simplify the system. We also expect new features to be added to the GST that will improve the compliance rate, such as invoice matching

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.

Banking on opportunities

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.

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