The Indian election: a 60 second guide

11 April 2019 marked the start of the election process in India, with current prime minister Narendra Modi hoping he has done enough to stay in power for a second term.

The process sees almost 900 million people eligible to cast their vote (that’s some 150 million more than the entire population of Europe!) to decide how the 543 Lower House seats are divided up, with a 272-seat majority needed.

Up to 10 million officials (the equivalent of everyone in Italy) will be managing the polling until 23 May across a million polling stations – reflecting the enormity of the event.

The ruling National Democratic Alliance is led by the Bharatiya Janata Party and prime minister Narendra Modi – who looks likely to retain his position either through a majority or another alliance to form his government.

What has Modi done since 2014?

Modi made a number of significant promises ahead of his electoral campaign in 2014 – many of which were unlikely to be achieved during one tenure in power. However, he has had a number of successes:

  • The Goods and Services Tax – This bill is important because it will replace a plethora of central, state, inter-state and local taxes with a single, uniform tax for goods and services, effectively making India one unified common market. In addition to improving the ease of business, it also reduced corruption.
  • Inflation targeting – While not strictly a Modi achievement, the central bank has helped reduce inflation from 10% in the previous five years prior to Modi becoming prime minister to less than 5% since 2014.
  • Indian bankruptcy code – The Government of India implemented the Insolvency and Bankruptcy Code (IBC) to consolidate all laws related to insolvency and bankruptcy and to tackle Non-Performing Assets (NPA)— a problem that has been pulling down the Indian economy for years. Prior to the law, the recovery rates for bad loans were 10% to 15% – however, some experts say this has improved up to 50%.

Some areas where Modi was expected to do more included greater job creation, as well as his “Make in India” campaign, the primary goal of which was making India a global manufacturing hub, by encouraging both multinational and domestic companies to manufacture their products within the country.

What is likely to happen in the 2019 election?

As already mentioned, it looks likely that Modi is now going to stay as prime minister either through a majority or through another alliance. This was not always the case, as his popularity dipped at the end of last year and the start of 2019 – something which subsequently hit the Indian equity markets.

However, Modi has moved quickly to create positive momentum ahead of the election both in the short and medium terms. This includes:

  • Minimum support prices for summer crops was raised last year – something which has created rural demand and a rural ‘feel good factor’. Modi took this a this a step further in February 2019 by offering rural farmers 6000 rupees ($84) a year. A small amount – but given they earn so little it is a meaningful amount to drum up further support among the rural community.
  • Increased tax rebates and exemptions for low-and middle-income earners. Both in the rural areas and the city.
  • Offer more support for the housing sector.
  • His reaction to the conflict with Pakistan has also boosted sentiment – and Modi’s image – domestically.
  • India also entered the space race – an action which pleases voters who do not want to be perceived as a developing country any more.

From an economic standpoint the appointment of a new central governor in December 2018 and, as a result, two rate cuts early this year, have been positive for markets. The economy has also been boosted by the fall in oil prices towards the end of 2018 – principally through easing currency and inflation pressures.

So what type of victory will Modi get?

Goldman Sachs India Equity Portfolio manager Hiren Dasani believes recent tensions with India and Pakistan are likely to have stoked nationalistic sentiment, with national security emerging as a key election issue – something which could increase the chances of a stable government coming to power.

He says: “The base case scenario heading into this election is that the BJP could get 220-250 seats thereby reaching the majority mark with support from parties within NDA or by seeking alliance with smaller parties outside NDA if required. Anything above 220 for a single largest party is usually considered as a strong outcome and would be liked by investors. 250+ seats for BJP is not entirely an unthinkable outcome and would be seen as a positive surprise.”

What impact will this have on markets?

Having outperformed the wider emerging market index in 2018 (the Indian stock market fell 1.54%* compared with a fall of 9.27%* for the MSCI Emerging Markets), the start of 2019 has been fairly volatile in the run-up to the elections.

So far this year, the MSCI India has returned 4.03%** but still lags the MSCI Emerging Markets Index, which has bounced back returning some 10.4%**.

Alquity Investment Management head of Asia, Mike Sell, believes the outcome of the general election is not priced into markets despite a 90% likelihood that Modi is successful. He says the outlook for India is strong citing potential economic tailwinds and the under-appreciated strength of the rural economy.

Hiren Dasani adds: “We believe India’s economic outlook remains one of the best globally, and arguably better now than at any time in the past decade. Going forward, we believe it would also be fair to assume that market volatility may remain, and sentiment may be somewhat anchored on the potential outcome of the elections, even though the historical evidence would suggest elections have limited impact on the long-term success of the Indian equity market.”

IIFL India Equity Opportunities fund manager Jonathan Schiessl says that although the valuations of Indian equities do look slightly expensive there remain opportunities. He says: “We believe a Modi victory is already priced in by the market to some degree. What shape or form that victory takes (such as whether it is a majority) will dictate the chances of any stock market rally and the strength of it.”


*Source: FE Analytics, total returns in sterling, calendar year 2018
**Source: FE Analytics, total returns in sterling, 1 January 2019 to 9 April 2019

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