Modi expected to win India’s upcoming election

Elections in emerging markets often unnerve investors. In India, however, the benchmark Nifty 50 index has jumped to a six-month high following the announcement that India’s national election will take place over five weeks between mid-April and late May.

“The world’s largest democratic exercise” involves 800 million voters, says Siddarth Shrikanth in the Financial Times. And “investors seem to be encouraged by the prospect of a second term” for Prime Minister Narendra Modi. It implies the continuation of his “pro-business agenda”.

A solid record

Modi’s first term has seen his administration address some of the red tape and structural problems that have held India back over the years. The government has created the world’s largest digital database of residents’ identities. It has also replaced many local taxes with one national goods and services tax (GST), a value-added tax. Furthermore, the government withdrew two large-denomination bank notes in a major crackdown on the shadow economy.

The government has fostered entrepreneurship in the countryside, which is often overlooked. Some 56.3 million rural women – equivalent to the population of Italy – have received small loans worth about $27bn since Modi took office in 2014, says Archana Chaudhary on Bloomberg. These low-interest loans and grants are allowing them to fund small businesses. Modi’s government has rolled this programme out to 622 of India’s 640 districts. It also “raised expenditure on sanitation and education for girls”. Now, rural women back the incumbent.

Gavekal Research estimates India’s GDP growth slowed to 6.5% in the fourth quarter of 2018, down from 7.1% in the third quarter. An ongoing problem hampering lending, and hence growth, is a credit crunch stemming from bad loans in the state banking system and recent turbulence in the shadow banking sector, a network of non-banking financial companies that provided nearly four out of every ten consumer loans in the last three years, notes Bloomberg.

The problem seems manageable for now, however, as we pointed out in November, while the longer-term outlook remains compelling. India is contributing as much to world GDP growth as the UK, France and Germany combined. The young workforce and expanding middle class implies strong consumption and growth for years to come. The big domestic market makes India less vulnerable to a global slowdown than its regional rivals. Exports comprise just 20% of its GDP. Our favourite India investment trust is Aberdeen New India (LSE: ANII), which is on a discount of 13% to its net asset value.