Asia Politics

Why India's election matters for US investors

Key Points
  • The Indian election, the world's largest democratic exercise kicked off this week.
  • The outcome could impact trade issues with the U.S. and regulation on foreign companies.
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900 million eligible voters make India's election world's largest democratic exercise

The world's largest democratic exercise has just kicked off, with India's 900 million eligible voters making a decision that could impact even the biggest U.S. companies like Amazon and Walmart.

While results won't be announced until May 23, investors are reading the tea leaves to see what may be on the horizon for trade issues and the regulation of foreign companies.

"If Modi is reelected, the market will have a broader assumption on what to expect. With Congress and regional parties, it's a whole lot less clear what the reform program will look like," Richard Rossow, Wadhwani Chair in U.S.-India policy studies at the Center for Strategic and International Studies, told CNBC.

Geopolitical consultancy Eurasia Group expects Prime Minister Narendra Modi and his Bharatiya Janata Party to win by forming a coalition. If the BJP does not win a majority in the Lok Sabha, the lower house of parliament, Modi would be limited in his ability to pass economic reforms crucial for the country's development as a global marketplace.

The coalition scenario could mean "less latitude to advance reforms," Eurasia analyst Akhil Bery said.

Regulation risks

Retail, especially online, has become a bigger focal point for investors. But industry analysts are worried that efforts to expand in India may be stymied by regulation.

While India is one the fastest growing economies in the world, unemployment is still on the rise, threatening the country's growth prospects. The latest data showed unemployment at 6.1%, the highest in 45 years.

Voters stand in queues to cast their votes at a polling booth for the first phase of general elections, on April 11, 2019 in Jammu, India. Voters in 18 Indian states and two Union Territories began casting ballots on Thursday, the first day of a seven-phase election staggered over six weeks in the country of 1.3 billion people. (Photo by Nitin Kanotra/Hindustan Times via Getty Images)
Nitin Kanotra | Hindustan Times | Getty Images

"Digital commerce is going to comprise a significant portion of India's economic growth. India is going to have make a decision on the kind of regulatory framework it puts into place," said Nisha Biswal, head of the U.S. India Business Council at the U.S. Chamber of Commerce.

After push back from local retailers and small businesses, the Indian government recently unveiled new e-commerce rules on foreign companies, targeting Amazon and Walmart's expansion in the country. Walmart acquired Indian online retail giant Flipkart for $16 billion last year.

"We've seen a shift back to a little bit more protectionism as the [Indian] government focuses on protecting local mom and pop retailers," said Dinesh Moorjani of Comcast Ventures to CNBC.

Trade looms on the horizon

After the ballots are counted, the winner will have to confront lingering trade issues with Washington. The U.S. threatened to remove India's preferential trade status, elevating friction between the two countries.

"There are a lot of tensions particularly in the U.S.-India trade relationship — and these are long-standing, they're not a surprise to anyone who has been tracking these issues," said Alyssa Ayres, senior fellow for South Asia at the Council on Foreign Relations.

CSIS' Rossow agreed, saying the trade fight with India has been going on "for quite some time."

"India was added to the currency manipulation watch list last year. And the Section 232 tariffs against steel and aluminum producers hit India even harder than China. India is a bigger steel exporter to the U.S. than China," Rossow said.

India requested an exemption, but that was denied. New Delhi subsequently threatened retaliatory tariffs, but those have yet to be implemented.

There are a number of other trade issues that could make it harder for foreign companies to increase their positions in India, said Ayres, who previously served as U.S. deputy assistant secretary of State for South Asia between 2010 and 2013. She said those include intellectual property rights protections, medical device price caps and limits on foreign direct investment.

An opportunity too good to pass up

But companies and investors could continue to direct capital to India in spite of a trade dispute.

India is an enormous market and is expected to overtake China as the world's most populous nation in just three years. Approximately 500 million of those people are internet users and half of India's population is under the age of 25.

Those demographics have enticed companies like Netflix, Alphabet's YouTube, and Amazon, which have been pouring money into generating localized content for the Indian consumer.

John Chambers, chairman of the U.S.-India Strategic Partnership Forum, said India and the United States are inseparable.

"As long as our government leaders do it right, I think you'll see this continue to evolve as the most strategic relationship to both sides," said Chambers, who is also chairman emeritus of Cisco.

Disclosure: Comcast Ventures is the venture arm of Comcast, which owns CNBC parent company NBCUniversal.

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India kicks off its 2019 elections. Here's what you need to know

Key Points
  • Some 900 million voters in India will elect members to the lower house of Parliament from today in an election that will spread over seven phases and end on May 19.
  • The main contenders for the election are Narendra Modi's Bharatiya Janata Party and its allies, and the Indian National Congress and its allies.
  • India follows the parliamentary system of government where the lower house comprises elected representatives.