Modi tested on governance

3 June 2014

After a long and frenetic campaign season, the world’s largest democracy (814 million Indians are eligible to vote and 540 million voted in the elections) handed a clear victory to the Bharatiya Janata Party led by Narendra Modi, the party’s greatest success yet (the BJP won 283 seats out of 543). For the first time since 1984, the winning party took the majority of seats in Parliament and will not need to form a coalition to govern the country. The outcome exceeds even Indian fund managers’ greatest expectations.  What does this victory mean? It is certainly positive for the country’s political stability as Modi will be able to govern for several years without having to compromise with smaller special interest parties.

The new government will need to take action on the country’s governance to improve bureaucratic transparency and efficiency and reduce corruption. This will boost the confidence of businesses, which in turn will fuel the economy through investments and the creation of new jobs. To this end, removing obstacles to a new round of infrastructural investments (roads, rails, electrical power stations, irrigation systems, etc.) will be crucial. The government will need to allow foreign businesses to make strategic investments, while providing clear information on the tax system.

Local managers confirm that, in recent years, companies have implemented effective cost cuts, improving their balance sheet structure. In addition, with inflation seemingly under control, a stabilized currency and interest rates normalizing, many of these companies, which have suffered substantial profit margin contractions may now rely on operating leverage from this point on.  According to many managers, this could be the start of a new cycle that could last for several years, in which the best companies’ earnings could grow at a rate of 20-30% per annum.