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Modi wins India’s General Election – what’s next for India in 2024?

As Narendra Modi secures another term as Indian Prime Minister, we look at what’s next.
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Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

It may have been a closer run competition than expected, but Narendra Modi has secured his third term as India’s Prime Minister. Modi and his BJP party have committed to modernising India and much of his electoral appeal stemmed from the promise of a more prosperous future.

India’s economy has grown by an average of 5% in real terms (after taking inflation into account) each year since the mid-1950s.

In recent decades, growth has often been higher - although it’s had steep drop offs at times, too, not least in the wake of the election. India is vast by area, vying with China for the largest population on earth, with both having an estimated 1.4 billion people.

By 2047, India’s centenary, Modi is targeting India achieving ‘developed nation’ status.

That’s a big ask for 100 years.

The commercial power of over a billion people moving to a higher income bracket in the world is obvious. And you can’t ignore the political clout that comes with that commercial strength.

India is going to be a major force in the years ahead, so long as it can keep its emergence into the developed world on track.

This article isn’t personal advice. Investments rise and fall in value, so you could get back less than you put in. If you’re not sure an investment is right for you, ask for financial advice. Past performance is not a guide to the future.

What challenges could India face?

Ambitions are easily set, delivering them isn’t as easy.

India’s economy might be growing, but it isn’t creating jobs at sufficient pace to absorb the rapidly increasing workforce. Joblessness and political stability are uneasy bedfellows. If jobs are scarce, the BJP’s future election success will not be secure.

India’s far from self-sufficient in energy, and the Internation Energy Agency (IEA) expect it will continue to import around 40% of its needs for some time to come. With growth comes rising carbon emissions, and India has seen emissions rise by over 150% so far this century.

Fossil fuels, mainly coal, still provide the bulk of India’s energy needs. This dependence on imported fuels creates a volatility that can be hard to control. The costs of cutting emissions as India grows will be challenging.

India’s corporate sector is highly concentrated. Indian fund management group Marcellus estimates the 20 biggest companies generate 80 percent of profit in India. That makes the nation’s progress critically dependent on a small number of corporates, themselves all too often controlled by powerful billionaire families. Politicians on all sides have claimed that these clans are buying undue influence.

India’s stock market has been a strong performer, however, the Indian currency has been weak, at times wiping out the benefit of the market’s underlying growth.

Recently, there’s been a retail trading boom, often in derivatives. Some market watchers have highlighted the risks posed by outstanding volumes of around $6tn of derivatives, often held by retail investors – 90% of whom have historically lost money.

Where are the opportunities?

A nation as large as India will always face risks. It goes without saying that there have been false dawns along the way. But the recent run of robust growth does appear convincing that India is making real progress in my opinion.

Even if Indian incomes are lower than European or North American levels in 20 years’ time, its economy could still be larger than either of those blocs, simply with its population size.

China’s population is also now flat to falling as the long-term consequences of their one-child policy unfold. We could soon see India become the most populated country.

Western businesses increasingly can’t ignore India, and domestic Indian enterprises know that their local markets are set for growth.

India’s also a beneficiary of China’s authoritarian shift. A growing number of companies want to reduce dependence upon China for manufacturing. But they don’t necessarily want to bring back production to the west.

‘China Plus One’ is the new plan, which retains access to China’s industrial infrastructure, but gives security of supply from a low-cost alternative.

India’s one of the leading ‘Plus One’ candidates. It has a young and rising population, often highly educated. Indian wages are also far below China and the west.

In fact, research suggests that India’s labour costs can be a quarter of those in China, although productivity in China’s well-invested manufacturing plants will likely close that gap somewhat.

In the short term, the combination of the Modi administration’s pro-growth policies, the natural momentum of a young and expanding population and India’s low-cost character are fuelling growth. Analysts at Morgan Stanley project that the economy will expand by double digits this year and next.

How HL Select gains exposure to India

There are many ways to achieve an exposure to India.

At HL Select, our approach has been to gain an indirect exposure by investing in the shares of companies that have operations in India, but which are listed in western stock markets.

British American Tobacco - this UK-listed company holds a quarter-share of ITC Limited, India’s market leader when it comes to cigarette production, as well as other food and household goods.

Diageo – this UK-listed international beverages business upped its exposure to India a decade or so ago by acquiring one of the nation’s largest distilling groups.

We hold British American Tobacco and Diageo in our HL Select UK Growth and HL Select UK Income funds.

HL Select Funds

Steve Clayton is Head of Equity Funds at HL and leads the HL Select fund team.

HL Select funds HL Select is a group of three funds focused on a small number of shares with long-term growth potential.

Investing in funds isn’t right for everyone. You should only invest if the fund’s objectives are aligned with your own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

The HL Select funds are run by our sister company Hargreaves Lansdown Fund Managers Ltd.

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Written by
Steve Clayton
Head of Equity Funds

Steve is the Head of our HL Select fund range, using his wealth of experience to craft the overall strategy for the funds. He also provides insightful analysis to clients from a fund manager's perspective, playing a pivotal role in letting clients peek behind the curtain.

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Article history
Published: 5th June 2024