This could be a new dawn for India – but should you invest?

It’s easy to be cynical about politics.

It can often feel that it doesn’t matter that much who runs a country. You get the same old noses in the trough and the same old Punch & Judy kickabouts in the press and the parliamentary chambers.

But occasionally you get results that matter. Regardless of what you think of his policies, the election of Shinzo Abe in Japan in 2012 marked a turning point for the nation. And it was also a cracking opportunity for investors.

Now India – while clearly a very different country – has voted for a similarly transformational politician, with a similarly massive majority.

So is it time to invest in India? 

Why India’s election result matters

Narendra Modi, leader of the Hindu nationalist BJP, has just been elected India’s prime minister by a landslide.

The markets are over the moon about it. The main Indian stock market index – the Sensex – is trading at record levels. The rupee is also recovering after a difficult year or so.

What’s so special about Modi? After all, the man he’s replacing – Manmohan Singh of the Congress party – was meant to be a fairly safe pair of hands too.

The short answer is that Singh disappointed. Although he started off well, GDP growth fell sharply over the last two years, and the government became entrenched in corruption scandals.

Modi on the other hand, has proved himself capable in the past. He ran the state of Gujarat for more than 12 years. During that time, the state saw annual growth averaging nearly 10%. It has 5% of India’s population, yet accounts for 16% of industrial output and 22% of exports, notes Reuters. Of India’s 29 states, it’s seen as the easiest to do business in.

As the BBC puts it, Modi “has built a reputation of being a pro-business, decisive and hands-on political leader who can get things done”.

Can Modi turn India around?

India has lots of potential. It has a young and growing population, which is a big advantage over China for example, whose population is ageing fast. But lots of countries have potential. Turning that potential into reality is where lots of them fall down.

The country needs to sort out its infrastructure. About a third of food produced in India is wasted, for example, partly because of the logistical nightmare of getting it to the end-consumer. It’s also a nightmare for doing business in – the World Bank ranks it at 134th in the world.

And the young and growing population needs jobs. An inflexible labour market and a focus on services jobs, rather than manufacturing (which is more labour intensive), means India isn’t creating enough jobs for its people.

Basically, India’s got a lot of the same problems it’s always had. The hope now is that Modi can do something about them, because he showed some ability to get things done in Gujarat.

Running a single state – while impressive – is a lot different to running an entire country. So it’s understandable that some scepticism might creep in. But what perhaps matters more than the specific candidate, is that lots and lots of people have voted for him.

Although the two countries have completely different problems, there are similarities between this election in India and the 2012 election that put Shinzo Abe in charge of Japan.

Both politicians promised a radical change of direction for the country. But what really matters is that the people embraced it and swept them to power on the back of that promise. It’s one thing promising change, but it won’t get anywhere if no one wants it to happen.

So the level of popular backing is at least as important as Modi himself. As David Fuller notes on, “it shows that the majority of Indian citizens from all backgrounds are fed up with corruption, the stultifying class system in their country, and the bureaucratic socialism that has stifled economic development”. That means there’s an appetite to carry out reform, which has been scuppered by various special interest groups in the past.

Should you invest in India?

When Japan voted for Abe, the market was picking up, but there was a long way to go. You can’t say the same for India. India has been one of the best-performing emerging markets this year (although Brazil has done even better). The Sensex is also trading at near-record levels.

That’s partly because India also has a highly-respected central banker in the form of Raghuram Rajan. He’s helped to tackle the country’s inflation rate by raising interest rates. The one concern is that his ‘hawkish’ attitude has annoyed some business leaders (businesses almost always prefer low interest rates) and there are murmurings of some potential friction between the new government and the central bank. But I suspect that Modi is more than smart enough to understand by now that when you have a central banker that markets like and trust, you stick with them.

My view is that if you already have exposure to India, I’d certainly stick with it. This election is good news and it might just be the start of something lasting.

If you haven’t, I’d still be tempted to put a little bit of money into the market. However, I wouldn’t go crazy – firstly, Modi might disappoint. You’ve got a lot of people with high expectations. It’s easy to fall flat when that happens. Secondly, all the excitement can’t disguise the fact that India isn’t cheap and it does have a lot of problems. Ideally, I’d rather get it for less.

But you can’t always get what you want. And while the market is at a record high, when momentum gets behind a story like this, it can carry a market a fair distance. Modi will be out to impress. A flurry of exciting announcements could take the market even higher.

If you fancy buying in, you could go for the JP Morgan India investment trust (LSE: JII). Another interesting option for investing in smaller Indian companies is the Aim-listed India Capital Growth Fund (Aim: IGC). It invests largely in small and medium-sized Indian companies. We’ll have more on India’s outlook in the next edition of MoneyWeek magazine, out on Friday. If you’re not already a subscriber, get your first four issues free here.

• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.

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