Investors have been warned against getting swept away by the euphoria surrounding the Indian stockmarket, following a major announcement by the country’s new government.
Last week, India’s president Pranab Mukherjee, in a speech to parliament, put forward the Narendra Modi-led Bharatiya Janata party’s (BJP) agenda for the coming five years, including bold plans, ranging from eliminating poverty to overhauling the tax system.
The president claimed that in 60 months the country would be able to say “with confidence and pride that we have done it”.
The BJP’s plans also include a new railway system and creating an environment that is “predictable, transparent and fair”. It also intends to rationalise and simplify the country’s tax regime to make it “non-adversarial and conducive to investment, enterprise and growth”.
After 10 years under the Congress Party, last month the BJP enjoyed a landslide victory as India’s 800 million-plus electorate went to the polls.
As a result of the BJP’s overwhelming win, India now has its strongest government for some 30 years. As a result, hopes are high that it will deliver on its many policies of reform.
This optimism was reflected in the rally the market enjoyed in the run up to the election, and even since the BJP’s victory was announced on 16 May, the MSCI India index has surged by 7 per cent.
But looking at the euphoria, Chris Palmer, director of global emerging markets at Henderson Global Investors, said: “Now the work needs to be done. But the question now is how is India going to pay for all of this?”
With the Budget arriving in July, the plethora of queries, namely with regards to how the government plans to kick-start its infrastructure programme, will hopefully be addressed.
Craig Botham, emerging markets economist at Schroders, said that, while the election result surprised on the upside, he was still unmoved in his economic outlook until more information is forthcoming.
“We will have to wait until July’s budget for our first real taste of where policy will go,” he said. “Consequently, we feel it is too soon to revise our growth outlook for India on the back of the election results.”
Paul Rodgers, manager of the Lazard Emerging Markets Core fund, said he was “pretty cautious” on the Indian market, in spite of the euphoria surrounding the election and the prospects of reforms. “The excitement around reforms wanes with the implementation of those reforms,” he said.
Mr Rodgers pointed to Mexico, where there had been huge optimism that the Institutional Revolutionary party (PRI) would transform the economy with sweeping reforms.
However, he said that “while they had a strong agenda and mandate, the government has been very slow to stimulate the economy and growth is well below expectations”.
Mr Palmer added that the decade of damage done under the former administration, especially to state-owned companies, means the BJP will have a lot of work on its hands.
“That repair period could lead to some temporary disappointment,” he added.
“Taxes and tariffs could go higher and it could be sometime before anyone sees the benefits. It will be interesting to look back in a year and see how many decisions have been made and how many have led to action.”
The world watches as India’s new dawn breaks
The Indian government has been incredibly aspirational in outlining its aims for its term in office. In high spirits off the back of its resounding victory, it has laid out its ambitions to revamp and modernise India.
One major interest for investors will be the promise to improve infrastructure, which is not only in itself an investment theme, but also once roads and railways work more efficiently, then all kinds of commerce become easier.
The president has been reported in the Indian press as saying he will aim to use a mix of private and public money to modernise its railways, including high-speed trains, a network of freight corridors and routes for perishable agricultural products. He has also pledged to improve the quality of life in rural villages.
