3 good investments in Modi’s India

3 good investments in Modi’s India

What will be the economic impact of Narenda Modi’s election as prime minister of India?

On June 11, 2014, Narendra Modi delivered his first speech as prime minister of India in the Lok. The first member of the Bharatiya Janata Party (BJP) to hold the post in a decade and with a fairly resounding win for his party in recent national elections, Modi is expected by many to effect significant changes in the South Asian nation.

The nature of the strong win and the doctrine of the BJP itself have bolstered a renewed optimism regarding India’s economy, a trend which was evident in economic indicators in the months leading up to the election itself. Moreover, Modi’s economic record as chief minister of Gujarat, his carefully crafted and vague economic statements during the campaign and an election won largely on promises of reform and economic renewal all seem to indicate that the country can expect an uptick in growth.

With this in mind, here is a look at three areas that may make for good investments in Modi’s India:

1. Bank stocks

On the morning after election results seemed to indicate a landslide win for the BJP, bank stocks rose considerably. ICICI, considered by many to be a good indicator of the country’s economic health, has done well and has continued to shore up its success since the victory looked apparent and in the weeks since the results were announced.

A study of recent election years seemed to indicate that growth of an average of one percent continues for at least the three quarters after an election, inflation eases, the rupee appreciates and foreign capital inflows increase. Growth, the ease of inflationary pressures and currency appreciation were all on the uptick prior to the national elections.

It is highly likely that these trends will continue for the immediate future, given the nature of the win and the policy goals of the more free market oriented BJP. The seeming confidence of the market, as well as the rallying of stocks, will likely further encourage foreign capital inflows.

2. Infrastructure

As with every developing country, infrastructure is absolutely critical to stable and robust growth. India, with its history of long-delayed infrastructure projects, has had mounting issues with infrastructure spending and allocation. To an extent, much of this arises from India’s rather complicated system of power sharing between national, state and local governments. The latter has often held undue power and influence that lead to misappropriation and mismanagement of funds.

As the opposition party, the BJP roundly criticized the ruling United Progressive Alliance for long delays and poor budgeting. In the party manifesto released shortly before elections began, the BJP strongly emphasized the need to develop infrastructure and to accelerate planned projects.

The manifesto stated the goals of improving and updating the country’s railways, launching an integrated public transport system, expediting freight and industrial corridors, modernizing and increasing airport and port infrastructure and, perhaps most ambitiously, creating national optical-fibre networks down to the village level. The manifesto and party officials have made statements acknowledging previous red tape and appropriation problems.

With both a frustrated populace and an election mandate predicated in large part on anger at economic stagnation, considerable incentives will exist to expand and address India’s infrastructure capabilities and needs. Whether it will be enough to compensate for institutional power sharing issues and historic problems remains to be seen.

3. Auto makers

As the country seeks to urbanize and overcome long-held cultural affinities for village living that dominate some localities, auto makers continue to see growing opportunities in India. Some foreign auto makers anticipate double-digit growth for the rest of 2014, as they look towards supplying one of the world’s youngest populations and fastest growing middle classes in a geographically disparate country.

Urbanization has occurred relatively slowly, so many auto makers have targeted rural markets for the last several years, although the past two years have seen slowed growth in sales that corresponded to slowed overall economic growth and reduced purchasing power for consumers.

While foreign companies will seek rural markets, local Indian brands will continue to dominate, with no foreign company save Hyundai holding more than 6 percent of the market. Importantly, growth in this sector will largely hinge on the ability for overall growth to continue and rebound and will be facilitated by improved infrastructure and the ability of the Indian middle class to continue to enlarge itself.

Aspects of the BJP manifesto and ongoing stalled trade deals indicate that protectionist policies still hold sway with considerable swaths of the electorate, particularly in areas like manufacturing. This will likely mean that the home field advantage of domestic auto makers is likely to continue for quite some time.

A general theme that emerges when one glances at these areas is this: India under Narendra Modi has great potential, both in terms of demographics and output. It is a nation that can be and wants to be on the move. Yet, to do so, India will have to address long standing problems such as corruption, the nuisances of power sharing at all levels of government and, ultimately, an investment in the human capital that is the country’s greatest strength and where its future lies.

Categories: Asia Pacific, Economics

About Author

Sean Durns

Sean Durns worked as a research assistant to a former high ranking Pentagon official and the Director of National Security Strategies at a DC based think tank. His analysis has been referenced by a variety of media outlets including The Wall Street Journal, Roubini's EconoMonitor, OilPrice, and many more. He holds a M.Sc. in History of International Relations from the London School of Economics where he focused on US foreign policy, security studies, and energy security.