Chetan Sehgal, portfolio manager of the Templeton Emerging Markets Investment Trust, considers the potential and challenges for India post the current elections.
India has started its general election process with voting continuing over a span of six weeks and concluding on June 1. The incumbent Bharatiya Janata Party (BJP), led by Prime Minister Narendra Modi, is widely expected to secure a comfortable victory. A third term will certainly be interesting for Prime Minister Modi as he looks to cement his legacy.
Modi’s current term has had its own challenges. The COVID-19 pandemic caused major disruption and setbacks for governments globally and India was no exception. Whilst the Indian economy is starting to thrive and has gained momentum, a third term will be an opportunity for the Indian government to undertake policies which had been delayed.
Should Prime Minister Modi secure a third term, it is likely that his focus on conservative fiscal policies will persist. A two-thirds majority of votes for the BJP and its coalition partners would empower Prime Minister Modi to make constitutional changes, addressing critical concerns among local businesses and foreign investors. Additionally, there is potential for judicial and economic reforms that could enhance the government’s capacity to generate additional tax revenue.
Investment in India’s workforce is another crucial area. Efforts are needed to improve female participation in the workforce, upskill workers to facilitate a smoother transition to new employment opportunities, and encourage greater youth engagement. Enhancing skills and productivity is essential for India to harness the benefits of its sizeable and youthful population.
Prime Minister Modi has dubbed the 2020s as India’s “Techade.” In the short term, the focus is to build capacity for domestic demand, while the medium-term focus lies in enhancing export capacity. Negotiations for free trade agreements are underway with the European Union and the United Kingdom. Additionally, the India-Middle East-Europe trade corridor is being developed to leverage tariff-free access to these markets.
These supply-side policies are equally critical alongside investments in manufacturing capacity, as they contribute to building a sustainable long-term export base in India. Recently, policymakers have emphasized investment in semiconductors to diversify the technology sector’s reliance beyond software services.
One of the longer-term challenges for the country will be on the climate side. India is experiencing heatwaves ahead of the summer season and some regions are having water shortages. Rising population and urbanisation have put further strain on country’s resources. Addressing these longer-term challenges should also be on Prime Minister Modi’s agenda.
India offers investors a significant growth opportunity given its structural tailwinds, which include attractive demographics, a market-oriented economy, and a rising middle class. These robust growth prospects are, however, reflected in valuations of many securities, which trade at a premium to other emerging markets.
We remain selective in companies we invest in and favour companies which have sustainable earnings power and whose share prices are at a discount to our estimate of their intrinsic worth.
