Indian election victory is the 'best possible outcome' for stocks

India's new prime minister, Narendra Modi, has a clear mandate to reform the economy.

"Indian voters have just handed Narendra Modi their most decisive mandate in 30 years," says Andy Mukherjee on Modi's Bharatiya Janata Party won 282 seats out of the 543 contested in the parliamentary general election that ended last week, making it the first party to secure an outright majority since 1984.

The landslide win "ends a tortuous era of coalition politics that has stymied policymaking" and "offers India a way out of its current limbo".

It's certainly a "positive development", says Singaporean bank DBS, but Modi's new government "is bound to face challenges on several fronts soon after taking office".

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The number of problems is daunting: bringing down the budget deficit, tackling inflation, boosting growth, keeping the current account deficit under control and making India a more attractive destination for foreign investment.

The immediate reaction from markets suggests they believe the government will deliver on its promises. Stocks rose more than 7% over the course of last week as the likely scale of BJP's victory became more apparent, while the rupee continued to rally. But "the to-do list is long" and the government will need "to walk the talk on reviving growth and addressing macro challenges".

For many voters, Modi himself is one of the key reasons to believe the BJP will meet expectations, says Deepak Lalwani of Lalcap. "Raising economic growth rates, improving infrastructure and slashing bureaucracy [are] all points he successfully achieved as chief minister of [the state of] Gujarat since 2001." Gujarat now accounts for 16% of India's economic output and 22% of exports, despite having just 5% of its population.

His past record suggests that he will act quickly to revive stalled reforms and introduce new ones. That said, it won't necessarily be straightforward to get all these measures through.

While the BJP will have a clear majority in the directly elected Lok Sabha (lower house of parliament), Modi will not have control of the Rajya Sabha (upper house), whose members are chosen by the state governments.

Given that, some caution would be welcome amid the euphoria, says Pankaj Mishra on There is a sense of deja vu around Modi's success: look back five years and the election of now outgoing prime minister Manmohan Singh received an "eerily similar" response.

"India's biggest businessmen, along with foreign leaders and journalists, vied to hail Singh... as an inspirational trailblazer." Yet, Singh's government ran out of steam long before its tenure ended. The Congress party he represented has suffered its worst defeat ever, winning just 44 seats.Trying to meet the needs of the "struggling majority", who make up most of the voters and the rich who are driving growth, proved impossible.

With expectations for Modi even higher, it remains to be seen whether he will prove more successful or whether he will ultimately meet Singh's fate: "despised by the very same people who once ecstatically heralded him as India's saviour."

Nonetheless, for now "this is the best possible outcome you could imagine", says Christopher Wood of brokerage CLSA on The decisive majority gives the incoming government a clear popular mandate and means that Modi actually has a "chance of effecting real change".

Combine this with indications that the current economic slowdown was already bottoming outand "India is looking extremely attractive... among the Bric markets, India would rank best right now".

Although Indian stocks are now trading on a significant premium over most other emerging markets, they continue to deserve the benefit of the doubt.

Cris Sholto Heaton

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.