India Fund

Modi Government Leading India to Success

Three years is a long time in politics. A lot can be achieved in that time despite being the ruling party in the world’s largest democracy with an underlying sentiment of cynicism on any change being implemented successfully. In fact, if you quiz India’s media on Modi’s success the response would be highly polarised.

The latest measure of Modi’s success can be gauged through his party’s (BJP) landslide victory at the polls on the weekend. The BJP won approximately 325 of 403 assembly seats in a state election of significance in Uttar Pradesh (UP), India’s most populous state, with over 200 million people. UP sends 80 legislators to the 545-seat parliament, positioning Modi well at the next national election campaign in 2019.
The result is a stunning endorsement of Modi’s popularity, reform initiative and hard-line towards addressing the issues India grapples with such as poverty, corruption and lack of a mandate to execute politically. It also indicates that Modi’s well discussed Demonetisation initiative launched late in 2016, cancelling 86% of India’s high value notes, did little to impact the growing sentiment towards Modi as the leader who can shape India’s future and improve global perception.

Modi’s scorecard since being elected in 2014 showcases the following:

  • Passing GST through the lower and upper house for implementation in 2H17
  • Reform initiatives such as Housing for all, Make-in-India, Smart Cities, Electrification, Swachh Bharat (cleaner India), Skill India, Digital India
  • Demonetisation which focused on reducing the usage of cash for payments
  • Increasing political popularity, particularly is significant states like UP. This should lead to a majority in both the Lower House (already in place) and the Upper House.

It remains to be seen whether Modi Government now takes on the challenge of broader market reforms like labour laws and land ownership, which if it can be addressed, would really open the doors to more significant foreign investment. Given the likelihood of a second term increasing (2019-2024), it is expected that we could be in for more bold decision making and greater follow through on reforms already commenced.

Whilst Indian equities may appear expensive to the naked eye at 18x FY18 earnings (12 months forward), we are likely to see a positive re-rating based on the fact that private investment and capex will benefit from improving sentiment and greater continuity from BJP’s execution. In our view this is likely to lead to an increase in the “e” component of the P/e, pushing prices upwards based on fundamental earnings growth – now that’s rare in a global equity market today that requires share buybacks and broader capital management to support its price.

India Avenue’s view:

We see the election victory by Modi’s BJP party as a clear sign that there is great belief on his political execution and moral authority. This sets the tone for another victory in 2019 at the National Elections, allowing the party a significant period to execute on its promises.
Regardless of the starting point, we foresee three to five years of strong equity market returns henceforth given a more unified India under the Modi Government. Since Demonetisation local investors have also focused significantly on equity markets given the challenges of Property and Gold investing as well as falling interest rates.

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