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India election: “Market has viewed Modi’s re-election positively”

Harsha Upadhya, Kotak Mahindra Asset Management
Harsha Upadhyaya, Chief Investment Officer – Equity, Kotak Mahindra Asset Management

Narendra Modi has been sworn in for a second term as India’s prime minister after his Bharatiya Janata Party won the recent India election. We asked Harsha Upadhyaya, Chief Investment Officer – Equity at Kotak Mahindra Asset Management, what the new Modi government means for India’s economy.

AsiaFundManagers.com: What does the election outcome mean for the Indian economy?

Harsha Upadhyaya: The incumbent BJP-led NDA coalition has won the elections convincingly by winning around 350 seats in the lower house of the Indian parliament, higher than its tally in the 2014 elections. The BJP crossed the half-way mark on its own, and got nearly two-thirds majority with allies, implying a stable government. By 2020 the BJP and its allies should also have a majority in the upper house, making legislative change easier. The market has viewed the return of the incumbent government positively; it will expect the government to announce further economic and governance reforms over the next few months. Policy continuity and predictability are the biggest positives for the Indian economy.

“Government would look to capitalize on former reforms for furthering economic growth”

AsiaFundManagers.com: India wants to become the third-largest economy by 2030. What needs to happen?

Harsha Upadhyaya: During the first term, the Government had created a framework around these broad areas:

  1. Introduction of macro- economic stability with special focus on inflation targeting
  2. Framework for last mile delivery of social benefits to underprivileged section of the society
  3. Implementation of Insolvency and Bankruptcy Code for facilitating exit framework for resolving insolvencies
  4. Implementation of GST as National Indirect tax system
  5. Infrastructure development across the nation

With a solid framework in place, the Government would look to capitalize on these reforms for furthering economic growth.

India’s share in the global export trade is tiny. The US-China trade war has created many opportunities – focus will be on growing the share of Indian exports. We expect the government to focus on creating and growing the export oriented private sector.  

The government is likely to promote a domestic savings driven investment led growth model. Providing adequate liquidity at lower interest rates for businesses will also be critical to revive slowing corporate growth in recent times.

We view two investment-related reforms as being critical to enhance India’s investment rate. First one are reforms in factors of production including labour and land. The second is a review of the role of the government in business (privatization of state owned businesses) and changes to extant ownership and pricing policies to encourage greater FDI and private investment in the critical infrastructure sector.

“Infrastructure and consumption main drivers of Indian economy”

AsiaFundManagers.com: What are the drivers for India’s economy?

Harsha Upadhyaya: India is a largely domestic focussed economy. Both infrastructure and consumption sides drive Indian economy. The consumption driven sectors such as automobiles, consumer durables, consumer staples etc have a large runway for growth in the long term given the large population base, demography, expected income growth and relatively low penetration levels. However, currently there seem to be a cyclical downturn with weaker consumer demand. We do not expect government to provide sector specific stimulus, if any. Hence, these sectors may remain weak in the immediate term, while the long term potential is significantly higher.

We expect continued focus on infrastructure development in the country, given those activities also generate high levels of employment. Furthermore, we anticipate government policy actions to support infrastructure creation and economic activity. Domestic economy recovery plays will be a continued focus in our portfolios. We like domestic cyclicals with high operating leverage. We remain overweight on Capital Goods, Engineering, Industrials and Cement sectors.

“India has all the ingredients to become a developed economy from a developing one”

AsiaFundManagers.com: What are the current reasons for investing in India?

Harsha Upadhyaya: India has all the ingredients to become a developed economy from a developing one. The recent political mandate implies a strong and stable political set-up and continuation of policy initiatives aiding economic growth. We expect the Reserve Bank of India to be more accommodative and the economy to come out of its soft patch of the past few months. Also, Earnings could be heading into a new cycle and domestic flows should also return with strength. The overall market may stay supported: relatively higher valuation multiples offset by healthy growth in corporate earnings.

AsiaFundManagers.com: Thank you very much for the interview.

 

Harsha Upadhyaya, Kotak Mahindra Asset Management, about India election outcome
Harsha Upadhyaya, Chief Investment Officer – Equity, Kotak Mahindra Asset Management

About Harsha Upadhyaya

Harsha Upadhyaya heads the equity desk at Kotak Mahindra Asset Management, and is responsible for overall equity fund management and investment strategy overseeing assets around $9.5bn. He also directly manages Kotak Standard Multi-cap Fund, which is India’s largest equity fund with assets of over $3.6 bn. He has over 23 years of rich experience in Indian equities.