India’s reform story intact despite election headwinds


India’s third-quarter (3Q) GDP growth for financial year 2018-2019 (FY18/19) came in at 6.6%.

The Ministry of Statistics and Programme Implementation estimated an economic growth rate of 7% for the fiscal year ended in March 2019.

The recent deceleration in growth was attributable to a slowdown in both government and domestic consumption.

Understandably, the rising trend in crude oil prices across most of 2018 has restrained the India government’s fiscal spending.

On the consumers’ front, wage growth decelerated, which may be attributable to a slump in both the agriculture and industrial sectors. These two sectors together employ more than two-thirds of India’s workforce.

India’s headline growth numbers may continue to soften over 4QFY18/FY19 and 1QFY19/FY20, but growth momentum should pick up again once election-related uncertainty fades.

The 17th Lok Sabha (India’s general election) this scheduled to start taking place this month from April 11 to May 19, with results to be released on May 23.

For the rest of 2019, we do not foresee a significant slowdown in growth. The recent introduction of income support schemes for farmers and tax rebate for lower-middle-income families may parry some of the headwinds from falling wage and moderating global growth.

The fall in crude oil prices could also help accommodate more fiscal spending.

Looking at India’s political front, the prospect is not looking great for the current ruling party Bharatiya Janata Party (BJP).

After losing some key states in December’s state elections, the consensus is still looking at a possible second term for current Prime Minister Narendra Modi, albeit with a reduced majority.

BJP campaign is expected to focus on the income schemes it launched for the poor, which aside from addressing employment and education issues for low-income brackets, include welfare benefits such as health insurance which aims to cover 40% of the country’s population.

Though opinion poll results are portraying some momentum, the Indian National Congress (INC) is still sitting at a distant second place.

The INC has ruled India for most of the post-independence period since 1947. The party channels its campaigning effort on topics such as agricultural distress and unemployment among youths.

Promoting small enterprises and getting the provision of food and security for Indians are also part of INC’s political agenda.

Looking at all the structural and economic reforms Modi has pushed through over the past five years, we think a second term for Modi is likely.

The downside risk to Indian equities is Modi not succeeding for a second term.

In the event of BJP losing its majority, we think a market correction is inevitable, but it does not mark the end of India’s growth story.

The major reforms undertaken by Modi (eg demonetisation, Goods and Services Tax, Digital India, etc) are here to stay because there is little incentive for the INC or the next ruling party to reverse those initiatives.

That said, the expected impact coming from policy continuity risks seem manageable.

Against a backdrop of decelerating global growth, India is vulnerable to external uncertainty.

The high valuation levels of Indian equities makes them less attractive compared to North Asian markets, leaving India’s equity markets susceptible to valuation contraction if expected earnings fail to materialise.