India: Implications for the new government

In the recent Indian elections, with the results declared on 16th May, the Bharatiya Janata Party...

In the recent Indian elections, with the results declared on 16th May, the Bharatiya Janata Party (BJP) and its allies won the largest majority India has seen since the 1984 general election, taking 282 seats in its own right against the meagre 44 seats won by its main opponent, the Rahul Gandhi-led India National Congress Party.

The BJP leader and new Indian prime minister, Narenda Modi, built a formidable reputation as a pro-business, pro-development, pro-reform, anti-corruption Chief Minister of Gujarat state in the proceeding decade leading up to these elections, where he was able to achieve 10% annual growth over the past five years1.

The Indian market has responded enthusiastically to Modi’s victory, which had been widely predicted in the polls since last year. The overall market is up some 5% since the election, up 16.5% since the beginning of the year, and up 21.7% over the past 12 months.2  Post May 16, the (Indian) S&P BSE Mid cap index has risen nearly 12 per cent, while the BSE Sensex Small cap index gained 15 per cent in a matter of just four trading sessions.3

What does this all mean for Australia, and Australian investors?

According to Dr Shane Oliver, head of investment strategy and chief economist at
AMP Capital, India’sper capita real GDP is about where China’s was in 2000 and its commodity demand is only around 15% of that of China. “However, its long term demand for commodities will be large and over time this will provide a strong source of growth for Australian exports. India is now Australia’s 4th largest export market, having risen rapidly from 7th largest in 2007 and 15th in 2001”.

Oliver added that presently, “On most metrics the Indian share market is expensive. Its price to earnings ratio and its price to book value ratio is above that in other emerging countries and the world average, and its dividend yield is far lower. However, with the election ushering in a business friendly reform Government, which should be very positive for long term Indian growth, any short term set back should be seen as a buying opportunity. Over the long term Indian shares are likely to be relative outperformers globally.”4

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