A New New Delhi?

Election Coverage

“Good days are here,” tweeted prime minister-designate Narendra Modi after he led the right-wing Hindu nationalist Bharatiya Janata Party to a landslide victory last Friday in India’s bitterly fought parliamentary elections.

He was perhaps hinting at the sweeping reforms he may undertake to make India’s growth story more inclusive after he takes charge of the nation’s affairs as its 14th prime minister next Monday, May 26.

The tech-savvy Modi, seen as a strong leader, sent the coalition led by the 124-year grand old Congress Party packing. Congress, led by Italian-born Sonia Gandhi, experienced its most humiliating defeat in any election since India’s independence in 1947.

The clear mandate for Modi’s BJP could mean a stable government for five years. That portends well for the markets, investors and an economy that of late has slowed, with GDP growth of just 4.5% in the financial year ended last March.

Foreign investors, who pumped $16 billion into Indian stocks in the six months preceding Modi’s win, shouldn’t be disappointed. If one were to go by market expectations, foreign institutional investors are likely to take more exposure in Indian equities. They already hold about 22% of Mumbai-listed equities, valued by Morgan Stanley at $280 billion.

This optimism is mainly due to perceived pro-business policies that Modi may roll out over the next five years as he sets out to rewrite the Indian growth story, as his credo has often been described by market participants.

That growth story took a beating in the last five years of Manmohan Singh’s government, which were marked—according to many—by policy paralysis, inaction and rampant corruption. True, Singh was prime mover behind liberalization of the economy as finance minister when it was opened up in 1991 under then-prime minister P.V.Narasimha Rao. But over the past few years his hands have been tied due to political structure in India—with the president of the Congress party wielding the real power.

Deepak Parekh, chairman of HDFC Bank, the fifth-largest Indian bank by assets and second largest private bank, aptly sums it up: “No one can give excuses anymore,” for nonperformance. Here, he is citing the conclusive mandate that Modi got to form the new government.

Parekh, a Modi supporter and doyen in Indian business circles, is not alone in his optimism. Christopher Wood, equity strategist at CLSA, Asia’s leading brokerage firm, predicted at a recent press briefing that investment in India will once again pick up and that markets will enter a new bull phase. He says there’s reason to be optimistic that the Modi government “would bring real changes.”  

The BJP election manifesto, written by party veteran Murli Manohar Joshi, emphasized infrastructure development, which could see as much as $1 trillion in investment over next five years. Investments in roads, ports, airports, basic rural and urban infrastructure construction and a promise to develop 100 modern cities and townships should generate lots of economic activity, several analysts have noted. Richard Rekhy, KPMG India chief executive officer, confirms: “We think this government would focus on infrastructure big time, that would be a big positive for the Indian economy. Improving [the] investment environment is also critical for improving business climate in India.”

If the BJP manifesto is Modi’s holy writ, then foreign investors should forget about investing in the retail sector, the only area to be restricted “to protect and allow neighborhood mom-pop stores to flourish,” as BJP’s senior leader Arun Jaitley has stated. Most other sectors in goods and services are likely to see greater participation by transnational companies, especially in capital goods.

What foreign investors and companies may also expect is an end to the red tape, bureaucratic hurdles and uncertain taxation regimen that caused such headaches for companies like Vodafone, Microsoft and Nokia in the recent past.

Modi and his government have their task cut out for them.