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Modi's likely return to power looks like good news for Indian economic growth, experts say

Key Points
  • Indian Prime Minister Narendra Modi's likely return to power for a second term will likely be positive for his country's growth, according to economists and investors.
  • Local Indian media reported that exit polls predicted a clear majority for Modi's Bharatiya Janata Party(BJP)-led National Democratic Alliance when votes are counted on May 23.
  • Experts say markets have already priced in a victory for Modi's coalition as well as his commitments to reform when he returns to power.
Narendra Modi, India's prime minister, reacts during a news conference at the Baratiya Janata Party (BJP) headquarters in New Delhi, India, on Friday, May 17, 2019.
T. Narayan | Bloomberg | Getty Images

Indian Prime Minister Narendra Modi's likely return to power for a second term will likely be positive for his country's growth, according to economists and investors.

Local Indian media reported that exit polls predicted a clear majority for Modi's Bharatiya Janata Party (BJP)-led National Democratic Alliance when votes are counted on May 23. While those polls have not always predicted election outcomes accurately, the consensus remains that it is very unlikely for Modi to lose power. Whatever else that may mean for the country, the prime minister's reelection is likely a strong signal for the economy.

"I think that a second term and a majority for Modi's BJP would actually be quite supportive for India's growth outlook," John Woods, chief investment officer for Asia Pacific at Credit Suisse, told CNBC's "Squawk Box " on Wednesday. "There has been some uncertainty and some instability, frankly, in the market and, indeed, in the economy over the last couple of years."

Some had doubted that Modi's government would pursue new economic reforms, but a solid electoral win may change that.

"I think with a renewed mandate this will be now focused on as a key policy initiative," Woods said.

Since 2014, the BJP-led alliance has governed India. During that time, Modi introduced a number of important economic reforms such as the Goods and Services Tax and demonetization — where all 500 and 1,000-rupee banknotes were unexpectedly withdrawn and replaced with new 500 and 2,000-rupee denomination notes. The government also took steps to navigate India through a banking sector crisis and overhauled the country's bankruptcy laws.

"If actual results mirror the exit polls, reform agenda will turn more inclusive, alongside fine-tuning initiatives that have already been undertaken," Radhika Rao, an economist at Singapore's DBS Group, said in a note this week. She added that infrastructure will remain an important area of focus for the new government, which is set to continue "the strong performance by the roads and transport sector, which has already fast-tracked many stalled and ongoing projects."

Boosting rural growth will also be a priority, according to Rao.

Markets want 'heavy lifting' from the government

Earlier this week when the exit polls indicated a favorable outcome for Modi, markets rallied. In equities, the Sensex was up 2.7% for the week at the end of market close on Tuesday. The Nifty 50, a well-diversified index of blue chip stocks in India, rose 2.64%. Meanwhile, the Indian rupee strengthened against the dollar from levels above 70 to around 69.6740.

Experts said markets have already priced in a victory for Modi's coalition as well as his commitments to reform when he returns to power. Credit Suisse's Woods pointed out that the markets have been under pressure for a while since demonetization was announced, but that seems to be improving and equity markets are now pricing in a more positive outlook.

Reforms are also said to be crucial amid an economic slowdown and an ongoing crisis for India's non-banking financial companies (NBFC). The market is "looking for a stable government to do the heavy lifting," Nilesh Shah, managing director of Kotak Mahindra Asset Management, one of India's prominent investment management companies, told CNBC's "Street Signs. "

"The economy is slowing down. The new government has to tackle investment as well as consumption. It also has to manage the NBFC crisis, which is ongoing. There is a burden of real interest rate, which needs to be cut. There is a lack of transmission of credit, which needs to be sorted out," he said.

Shah added that flows into the Indian market from foreign institution investors have been "quite supportive" as they are now willing to take a longer-term bet on South Asia's largest economy. Still, he said, if the market is pricing in all the positive outcomes from Thursday's election results, there can always be some disappointment.

Rashesh Shah, chairman and chief executive of Edelweiss Group, said investors — both foreign and domestic — have been holding back from putting money into Indian stocks and bonds because they are waiting for an "economic revival." Eldelweiss Group is one of the largest financial conglomerates in India.

He told CNBC's Tanvir Gill on Wednesday that he expects some loosening in fiscal and monetary policies in the coming year, which could boost corporate earnings and the economy.

"Now the time has come to step on the accelerator," he said.

Improving private investments

India has yet to release its GDP numbers for the fourth-quarter of the previous fiscal year — new fiscal years in the country begin on April 1. But the expectation from economists is that there was a slowdown in growth.

J.P. Morgan India Economist Sajjid Chinoy said he expected that number to come in the "very low 6s," meaning anywhere between 6% and 6.5%. But the good news, he told CNBC's "Street Signs," is that some of the factors that led to the growth slowdown were "transitory."

"The real issue here that the next government has to address is growth for the most part in the last few years has been driven by one engine, which is consumption," he said. "When you have a car riding on one engine, at some point that engine gets exhausted. We're seeing that — both rural and urban consumption have begun to slow over the last year."

Chinoy said the authorities need to find more systematic ways of resolving tighter financial conditions in the NBFC sector.

"We need to ensure that the conditions for the next private investment cycle, over the next 12-18 months fall into place," he added.

Experts also said the government has to account for how external factors, including oil prices and the ongoing trade tensions between the U.S. and China, could affect growth. Kotak's Shah said that there could be an opportunity for India to lure manufacturers away from China to avoid tariffs.

"India is a large domestic market and it can provide an attractive platform for those manufacturers to settle their bases over here," he said.

—CNBC's Yen Nee Lee contributed to this report.