Exit polls point to better than expected NDA results.
A likely strong mandate would facilitate a continuation of a growth oriented reform path.
The economic growth outlook is expected to improve as well as financial market sentiment.
What has happened?
Based on the exit polls conducted by local media, the Prime Minister Narendra Modi could win a second term in India’s general election. The final official results of the election will be released on May 23. However, on Sunday, the polls suggested that the ruling Bharatiya Janata Party (led by Modi) and the National Democratic Alliance (NDA) won a clear majority in the world’s biggest election. The exit polls also showed that Modi’s NDA could have won more seats in the parliament than they did in 2014.
India equity market reacted strongly to the exit poll result of Modi winning a second term. India’s benchmark index NIFTY 50 increased 3.7% on Monday, May 20 (+9.2% ytd). Indian Rupee appreciated as much as 1.1% against U.S. dollar and closed 0.74% higher on the day.
In the past, the Indian exit polls were not reliable in predicting the final election results, due to the large regional electorate differences across the country. However, in 2014, the exit polls correctly predicted Modi’s winning in the election. While the official result is not yet announced, Modi’s re-election is clearly the market expectation. The Modi administration has implemented forceful reforms in the economy in past five years. In particular, his government created a unified national goods and services tax (GST). Besides, the Modi government made it quicker and easier for companies to go through bankruptcy. This time, Modi’s re-election could reduce any policy uncertainty in India. A strong mandate would support Modi in coalition negotiations, to keep a strong focus on a continuation of the reform path and several growth critical reforms.
Infrastructure investments (especially in rural areas)
Less restrictions on foreign direct investments (FDI)
Lower corporate taxation, but government debt control is key, e.g. improvement on the revenue side via property and personal income taxes
Improving insolvency law and transparency
India’s growth moderated since 2H 2018 mainly due to the slower consumption growth. Investment activities were also affected by election-related uncertainty. However, in coming quarters, we think India’s economic growth could likely pick up on the back of the government’s fiscal support. In case of Modi’s re-election, we think more pro-growth measures are likely to be announced which should support business sentiment. Better business sentiment could be positive for corporate investment activities given the tight capacity utilization in India. India’s economy is mainly domestic-driven, and thus less affected by global trade tensions. We expect India’s economic growth to pick up to 7.8% in 2019 and 8.0% in 2020. Having said that, we think the key risk factors to India’s economy are 1) any rise of the oil price due to geopolitical tensions as India is a net oil importer, 2) any unexpected rise of U.S. dollar in 2H this year due to relative differences in interest rates across countries and different sensitivities to U.S. driven by trade uncertainties.
Download this CIO Insights Memo as a pdf here.