In just a few weeks, the world’s largest democracy will go to polls to elect a new parliament for a five-year term. Prime Minister Narendra Modi, who’s been at the helm for the past decade, will hope to hold his sway over the electorate once again. Modi’s Bharatiya Janata Party (BJP) will be pitted against the Indian National Congress, which had ruled the country for most of the period after independence in 1947, and a host of regional parties. Political parties across the spectrum are busy forging alliances before nationwide campaigning gains momentum.

Will the election lead to continuity or change in policies? That’s the question that’s uppermost in the minds of most investors. Following a resounding victory in some state elections towards the end of 2023, Modi’s supporters believe he has gained validation for his pro-growth policies. A booming economy, a rapidly digitalising economy, a unified tax regime providing fillip to revenue generation and fiscal consolidation, softening core inflation and a stock market that recently hit an all-time high (US being the only other major economy to achieve this) in dollar terms have all raised India’s profile globally.

Structural factors back growth

While the rest of the world is grappling with high interest rates and tepid growth, India’s central bank projects the economy will expand 7% in the current financial year and next. That would make it the fastest growing major economy in the world. Even as China is weighed down by a struggling property sector and tensions with the US, India’s attractiveness is underpinned by demand from a relatively young population, competitive labour costs, relatively low amounts of debt compared to other countries, and an increasingly favourable environment for doing business.

The government’s renewed focus on manufacturing, a boost in capital spending by both the private and public sector, and a global move to diversify away from China following the supply-chain bottlenecks witnessed during the Covid years are among the factors that could sustain the growth momentum. The government’s $26 billion Production Linked Incentive scheme is aimed at spurring the manufacturing sector, with an aim to move up the value chain.

The International Monetary Fund forecasts that the Indian economy, which is now the fifth largest, will become the third largest in the world by 2027. We believe that India can sustain a robust pace of growth in the coming years, supported by positive structural factors and policies.

Stock gains driven by domestic savings

This optimism is reflected in the stock market, which is being increasingly driven by domestic savings, helping blunt any undue volatility. Tens of millions of Indians regularly save in Indian stocks, with about $2.5 billion coming in every month from these savers. This is in addition to investments by pension funds, foreign buyers, and life insurance companies. Some point out that the sustained rise in stocks in recent years has made valuations expensive. We agree that the stocks are not relatively cheap but it’s worth remembering that corporate profitability has continued to surprise on the upside, justifying the valuations.

One important aspect distinguishing India from the US and Europe is the broad-based rise in stocks across sectors and categories. This stands in contrast to the US, which is dominated by the “magnificent seven’’ technology companies, and Europe, where “GRANOLAS’’ are all the rage.

We believe there are good opportunities in a wide range of sectors including banks, insurance companies, health sector, pharmaceutical companies, and infrastructure such as ports and airports. If we need to mention a risk to our overall positive view about India’s prospects that would be geopolitics. We believe the volatile geopolitical environment could pose a risk to rapid growth if that causes a spike in oil prices given the country’s heavy reliance on energy imports. Going back to the political scene, the election fever has already gripped India and we expect the current gains on the growth front will be secured further in the medium term once the polling dust settles by summer.

The value of active minds: independent thinking


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