The 2024 India election result saw Narendra Modi’s Bharatiya Janata Party (BJP) win the largest number of seats, albeit a smaller number compared to the 2019 election.
While disappointing and with potentially negative consequences for selected market sectors, we don’t believe it will change the policy direction of the BJP-led National Democratic Alliance (NDA).
The focus will remain on developing the manufacturing base via the Production Led Incentives (PLI) scheme, the transition of growth in infrastructure from the public to the private sector, as well as renewable energy and stimulating consumption. There will also potentially be renewed attention on rural incomes.
On manufacturing
The BJP will likely push ahead with developing India’s manufacturing base during its third term. It has had significant success in attracting major Taiwanese contract manufacturers to assemble consumer electronics for leading global brands. This has created significant employment opportunities.
The PLI scheme has been a success, particularly in the semiconductor sector, which accounts for $20bn in grants and subsidies in the 2020-2025 period. Nvidia and Micron are establishing engineering centres of excellence in India, with plans to employ up to 10,000 workers. These investments by industry leaders are significant as they expand the high-skilled employment base beyond India’s traditional strength in global capability centres and technology solutions consulting.
One of the focus areas for prime minister Modi in his third term will be to leverage India’s position in the diversification of global supply chains. India is already having significant success in capturing investments by multinational companies searching for an additional manufacturing base outside China. One of the key attractions for these companies is the huge pool of skilled workers with wage levels below those prevailing in China.
On infrastructure
The pace of public sector infrastructure spending in India is expected to slow. Relative to growth of at least 20% over the past three years, it is expected to decelerate to 12% in 2025. However, as public sector spending slows, private sector infrastructure spending is expected to accelerate.
The pickup in private sector spending will be facilitated by the significant improvement in cash flow amongst the top 150 companies in India. Pre-Covid, these companies were generating $10bn in free cash flow annually; this has accelerated to S$40bn this year as faster top line growth has contributed to an improving cash position.
Public sector investment should continue to focus on transportation infrastructure, with the private sector likely to drive investments complementing the development of the manufacturing sector. This includes investment in factories, dormitories and renewable power.
On consumption
Analysis of the voting patterns in the recent election indicate the BJP did worse than expected in its share of the rural vote. This indicates there may be renewed focus on rural voters in Modi’s third term. Improved tax collection and expectations of a better 2025 fiscal position gives the government greater flexibility to increase spending in rural areas, including a focus on increasing fiscal transfers. This is likely to benefit the consumer discretionary and staples sectors, which are a focus of our investments in India.
There is also the possibility of loan forgiveness for farmers, but given the fiscally conservative focus of the government, this is not expected to feature prominently. Nevertheless, public sector banks have come under selling pressure as investors fret over a potential increase in non-performing assets. Our portfolio managers prefer private sector banks in India to mitigate against this risk.
The Indian election outcome is clearly a disappointment for investors relative to earlier expectations. Nevertheless, it is important to focus on the long term, and we do not anticipate significant policy changes in Modi’s likely third term. The drivers of India’s growth will remain centred on manufacturing, infrastructure and consumption.
Within the TEMIT portfolio, we are currently underweight India relative to the MSCI Emerging Markets index as we feel the positivity we outlined above has already been factored into the Indian equity market valuations.
Valuations for a range of companies, particularly consumer-facing companies, remain elevated and we are being selective there. We continue to see value in private sector banks such as ICICI Bank. Several IT services companies and platform businesses can offer affordable goods and services via new distribution channels. Here, we hold two US-listed global technology services companies with significant operations in India that lessen our relative underweight position to Indian companies.
Andrew Ness is portfolio manager of Templeton Emerging Markets Investment Trust (TEMIT). The views expressed above should not be taken as investment advice.