India's elections are finally over after four weeks of voting, and the man everyone expected to become the next Prime Minister, Narendra Modi, will undoubtedly be chosen by the newly elected BJP party to lead them forward. Everyone in the market predicted a Modi victory. No one predicted a Modi landslide. BJP and its political allies have nearly full control of Parliament. Modi has himself a mandate.
The market reacted Friday by pushing up Indian stocks, with the hotly traded Wisdom Tree India Earnings (EPI) exchange traded fund up more than 5% in intraday trade.
If the consumer is the story in China and Brazil, infrastructure is the story in India. And Narendra Modi, or NaMo as he is now popularly known, is the man to deliver the goods in what is still an extremely poor country.
Narendra Modi in Varanasi India, an ancient Hindu city along the Ganges River. Modi clobbered the rival Indian National Congress in this year's election to become the new Prime Minister. Markets are as pleased with the outcome as the majority of Indian voters. (Campaign file photo.)
Per capita income in India is under $2,000 a year, three times less than development crazy China.
Last week there was a risk that results would disappoint and that the optimism of recent months would sour. That would depend on the ruling Indian National Congress, led by Sonia Gandhi, to maintain some of its seats in Parliament. Instead, Gandhi's party and her coalition were nothing short of crushed. Friday's final body count surprised to the upside in favor of market favorite Modi, giving investors a reason to be more bullish.
"The inbox for the new government is a busy one," says Craig Botham, an emerging markets economist for Schroders, a U.K. investment firm.
"There is an investment bottleneck to clear, fiscal consolidation will be important, and central bank governor Raghuram Rajan is keen to move to inflation targeting. Over the longer term, inefficiencies in the land and labor markets must be addressed, and the tricky issue of foreign investment resolved," Botham says. "A majority for the BJP greatly reduces the need for compromise and could mean that we see reforms pushed through relatively quickly."
India has nearly a dozen political parties, so the need to form coalitions is imperative in forming a government. The problem is that those parties do not always see eye-to-eye, often leading to policy paralysis. But this time, Indian voters gave carte blanche to Modi, at least in the lower house of Parliament.
The BJP-led government will still have to negotiate with state governments and the upper house, but Indians by and large are unlikely to tolerate gridlock. Some state governments aligned with the Indian National Congress could prove particularly obstructive. Although Modi is a Hindu nationalist, he never made religion in an issue, or tried to drive a wedge between Muslim and non-Muslims states in India. Botham says the result is a positive one for the Indian economy.
"People have given Modi a lot of front-end expectations," says Joel Wells, a fund manager at Alpine Woods Capital in New York. "The degree and efficacy of reform will depend on what kind of mandate he has. And now that the market knows what kind of mandate he has, it will act accordingly."
Indeed it has. The Sensex rose to a 52 week high of 25,375 at the opening, nearly 2,000 points above Thursday's close. On Wall Street, the iShares S&P India Nifty 50 (INDY) ETF was up by 4.5% with two hours to go in the trading session on Friday.
For the first-time since 1989, a single party will be in control of India's government. Modi's Bharatiya Janata Party — better known by its acronym BJP — has over 300 seats of the 543 seats in the lower house of parliament. It only needed 273 to form a new government without having to beg other parties for support. As a result, Modi will clearly be chosen as Prime Minister by BJP. That will be made official on June 1.
Overlooked in the political upheaval is the fact that the Ghandi-controlled Indian National Congress Party mustered less than 59 seats. They used to have over 200. Gandhi's son, Rahul, was to become next Prime Minister if Congress managed an upset. On the ground in India, it appeared Rahul had other things on his mind other than campaigning. This election year was nearly all about Modi. To use a boxing match metaphor, Rahul had no chance to go two rounds with golden gloved Modi.
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