India’s Ballot Bonanza

Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.

India’s Ballot Bonanza

If you think preparing for EU elections is a headache spare a thought for India’s electoral commission. They must contend with the biggest election in the history of the world (by population). This week, 1 million polling stations will be set up for 7 stages of voting, catering for an estimated 900 million voters. A turn-out of between 65% and 70% of those eligible to vote is expected with the result being announced on the 23rd May.

The vote taking place will elect parliamentary members into the seats of the lower house (Lok Sabha). A majority in the Lok Sabha gives control of the government. Currently, the majority is held by the Hindu nationalist Bharatiya Janata Party (BJP), led by Prime Minister Narendra Modi. His party has been in power for the last 5 years.

In the upcoming elections competition is expected to be fierce. Insults will no doubt be traded. One thing is for sure, the opposition will be keen to draw attention to all failings of the existing government. In the opposition camp, Rahul Gandhi, the descendant of two former Prime Ministers, is his nearest rival. He is a fierce critic and a strong contender. Also, Congress is looking to build alliances to defeat Modi.

Modi was elected in 2014 to kickstart a stalling economy. High levels of inflation and weakening levels of international competitiveness were holding back progress. Stripping back the complexities around local government spending, regulation, tax structures (introduction of a simplified goods and services tax) and by encouraging foreign direct investment Modi has embraced free market forces.

Modi’s direct leadership style was demonstrated in 2016 when the BJP announced they would withdraw all high-value banknotes from circulation, removing 85% of cash notes, almost overnight to wash out any undeclared wealth and encourage the push towards electronic finance. The immediate effectiveness was not as expected with 99% of notes withdrawn being returned to the banks, suggesting these piles of cash were not under mattresses but embezzled in the financial system and all the unrest, pressure on rural business and humanity was brushed under the carpet building ammunition for his critics. The longer-term impact, however, is believed to have been more effective, contributing to an uptick in tax revenues of around 30% since 2016 through increased transparency, helping to identify tax evaders.

The impact on the economic landscape has been meaningful, not least to the competitiveness of business. In 2014 India was ranked 142 (out of 190) in the World Bank’s ‘ease of doing business’ survey. India is now ranked 77th, with a goal of being in the top 50 by 2020. Improvement’s across business have had a positive impact on the economy. Recently, we wrote about India’s improving growth trajectory and how it is set to outpace China. We show this again in the chart below.

Annual GDP Growth % – India and China Compared

Source: Bloomberg, April 2019

Modi is keen to maintain growth at a fast clip. He also aims to enhance social security, job creation, and agricultural stability. The latter is where he has received most of the criticism. Consequently, he is now aiming to double the income of farmers by 2022. Although the agrarian economy tag placed against India is lessening, agriculture continues to be very important, particularly in rural India. To reach out to farmers Modi is proposing government subsidies and easier access to finance for capital investment. He is also introducing a pension scheme for small farmers. These policies play well with rural voters, but cynics worry about sustainability of such intervention. They also see a government keen to keep a check on inflation. This means keeping a lid on food prices which, ironically, pressures farm incomes.

As it stands the BJP looks likely to win, but they are not being complacent. They are putting everything into winning and as the incumbent government they can shape policy to win votes. From a global economic perspective, a Modi government will be welcomed. It offers stability and it represents a known entity. In a country where annually 10 million people will join the workforce a successful leader can make a significant difference.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.

Global Markets