Kate Marshall 24 May 2019
Narendra Modi's Bharatiya Janata Party stunned markets on Thursday with a sweeping victory in India's general election.
The vote counting is still going on as I write. But the leads so far indicate the BJP is likely to win nearly 350 of the total 542 seats.
It's not the first time Modi's hit the headlines. He won his first election victory five years ago and wowed markets with his pro-business rhetoric.
But the magnitude of his latest win is unprecedented. His share of the vote has risen from 31% to over 41% – one of the biggest increases in history. The back-to-back wins are also the first time any party other than Congress, the opposition, has secured two consecutive, single-party majorities in parliament.
The significance of Modi's second term in parliament shouldn't be underestimated. It gives him a fantastic platform to drive his mandate forward and enact change. India's mark on the global economic map is getting increasingly large, and all eyes are now on Modi to help fulfil its potential.
A wave of renewed optimism spread throughout the world's third largest economy when Modi was first elected. And he's since implemented some key pieces of reform.
Pulling India's 1.1bn population into the financial system was high on his agenda. 99.9% of Indian households now have access to a bank account – this might be the status quo here in the UK, but in India it marks an important step.
In the past, wages and social security benefits were often misdirected and ended up in the hands of the wrong people. But having a personal bank account changes all this. It helps pull people out of poverty and can even drive consumption, which benefits the economy.
A new tax regime, similar to our VAT system – the Goods and Services Tax – was also introduced in 2017. It was on the cards for years, even before Modi came to power, but consistently failed to fully materialise. Now it's in place it could streamline the country’s complicated tax system. It's expected to reduce the cost of doing business in India, increase central government tax revenues, lower company logistics costs, and improve efficiency.
There's plenty of work to be done though, and Modi hasn't delivered on all of his promises just yet. Unemployment is reported to be at a four-decade high, and arguably the economy is growing too slowly to create jobs for the million Indians entering the labour market every month.
India's also in desperate need of better infrastructure.
There's been some progress here – 300,000 villages now have electricity and 93% of households have access to cooking gas.
But access to land, which is expensive and difficult to acquire, is still a key reason why road and other construction projects stall in India. The parliamentary upper house, where the BJP doesn't currently hold a majority, previously rejected a land acquisition bill. But this could all change now the party has more power in the lower house of parliament.
What does it mean for investors?
The key question for investors is what impact this will all have on the stock market.
Modi's efforts to improve and formalise India's financial and healthcare systems could benefit companies in these sectors.
Tax reform and ensuring businesses and individuals have bank accounts benefits the banks and financial services companies. There are also expectations that Modi will sell off public sector assets to fund his investment plans – in particular oil and gas companies.
But political and economic change is a long-term game and investors shouldn't expect to see any share price movement overnight.
Arguably the most important thing to look at is company earnings growth. This is ultimately what drives share prices over the long run. Our analysis suggests share prices have continued to rise in recent years, even though earnings have remained fairly subdued. If earnings growth doesn't come through soon, share prices could eventually revert to a level to reflect this.
Modi's already announced and implemented a number of radical and far-reaching reforms in recent years, and there could be plenty more to come. Over shorter periods this could put pressure on economic growth and company earnings. And investors should be mindful India is still a developing country. It remains vulnerable to economic shocks, and implementing economic and political reform will take time.
We think the longer-term prospects look promising. Over the long run Modi's policies could help more people to become economically active, stimulate consumer demand, and help the country transition into a modern-day economy.
If you're considering an investment, a long time horizon is essential for investing in this higher-risk region. Investments also fall as well as rise in value so investors could make a loss. Our favourite way to access India's exciting potential is the Jupiter India Fund.
This article isn’t personal advice, if you’re unsure please seek advice.