India remains a private sector powerhouse – regardless of election outcome

Market Updates , Equities 5/13/2019 by Jin Zhang
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The general election in India this year is shaping up to be a vote on whether the right-leaning Bharatiya Janata Party (BJP), under the leadership of Prime Minister Narendra Modi, will stay in power and the extent of its power as determined by the number of seats in parliament. For reference, India operates a bicameral parliamentary system with the lower house – Lok Sabha – elected every five years. The party winning the Lok Sabha election will form the government. However, if no single party wins over 50% of the votes, the government will be formed by coalitions built around the dominant parties.

This year, the BJP is the incumbent and despite a slow start, the BJP is now widely expected to win again. While there are uncertainties around the number of seats the BJP may win, most analysts are expecting a smaller victory than the sweeping election that the BJP won in 2014.

In general, the market likes continuity, and perceives the BJP as doing a good job. Most people believe that the reform measures and high economic growth rates under Modi have been a positive. One of the most significant achievements of the Modi administration over the past couple of years has been the ability to push through some important reforms such as the Goods and Services Tax (GST) and the Bankruptcy Law. It is of the utmost importance that the administration—whether it be a Modi re-election or a change in government—continues on this path.

Reforms needed to attract more capital flows

Reforms are key to attracting more capital flows since they are needed to improve the country`s infrastructure, loosen up the labor laws and reduce rules and regulations. Many reforms have been in place for a long time, but not all of them are necessary or effective.

One particular area that will benefit most from reforms is the power sector. To improve power availability and stability is a precondition to getting more manufacturing businesses into the country. 

Operating in India is not an easy undertaking. The country is very large and diverse. Infrastructure and regulatory constraints make doing business in this country challenging. This is why it is important for investors to select companies that know how to navigate such difficult terrain. For example, Housing Development Finance Corporation (HDFC) can operate in all different states while having a firm understanding of the complex business of real estate. In addition, the company is very experienced in dealing with these challenges in its mortgage finance business.

The same goes for ITC, the largest tobacco company in the country. ITC is very capable of operating under different rules and regulations in different states and has previously prospered in this kind of environment. The ability to navigate such a landscape is advantageous for the incumbent and forms barriers to entry for newcomers, including international challengers.

Indian financial sector will benefit regardless of election outcome

No matter who wins the election, financial services companies stand to benefit. That is because both parties will emphasize job creation and improving infrastructure, which will help to create more middle-class jobs. The newly minted middle class will need auto loans, credit cards, mutual funds and other financial products. Companies well positioned to benefit from this are HDFC and HDFC Bank. HDFC Bank, the largest private sector bank in the country, is a leading player in all the relevant financial services areas mentioned above. The bank has delivered 20% return on equity and about 20% growth in the past two decades, and is likely to continue on this path. In our opinion, that is a primary example of the kind of business that should prosper no matter who is in control of the government.

Oil price spikes as main risk

The biggest overall risk to India’s economy is a sharp rise in global oil prices. It is clear that India does not produce nearly enough oil and needs to import approximately 80% of what it consumes. High oil prices will be a challenge to the country. It will widen the current account deficit and pose a challenge to the government budget, because the call for the government to provide some kind of subsidy will likely get louder.

With this in mind, companies capable of navigating these economic challenges and their risks are attractive. For example, IT services companies, including TCS and HCL Tech, are globally competitive and depend on global demand rather than domestic demand. HDFC, HDFC Bank, and ITC are experienced operators and low-risk businesses.


Upcoming elections aside, India is among the stronger developing countries and solid in the global context. The country has robust and sustainable growth, and not a lot of foreign debt – its debt profile helped it to avoid the concerns impacting other emerging markets when the U.S. dollar strengthened. The stock market tends to get excited or depressed by political developments, but the reality is that India’s growth is driven by its large, diverse and dynamic private sector.