More than 800 million Indians will go to the election polls in the next month as they participate in the largest global democratic exercise of its kind. These elections are critical since global investors are evaluating all emerging markets through the lens of reform potential. The frontrunner in India, Narendra Modi of the BJP, has exhibited decisive reformist ability over the past 13 years in his state of Gujarat. His economic manifesto focuses on industrialisation, investment in infrastructure, clearing red tape and fiscal federalism. A positive election result for the BJP will be celebrated by the market: the BJP acknowledges the correct supply-side constraints of the economy and is determined to kick-start a capex cycle to reinvigorate growth. Indeed the combination of the RBI moving responsibly to an inflation-targeting regime, alongside a government fixated on supply-side reform, would be a formidable policy mix.
Modi continues to thrive in the polls — we noted serious momentum building behind him as he has struck a chord with the 97 million newly enfranchised youths. He has commandeered social media and promised more than 10 million jobs by reviving the static manufacturing sector — this will be critical in reaping India’s unparalleled demographic advantage. If the BJP is able to gather more than 220 seats on 16 May, the implications will be significant. In particular, domestic cyclicals and mid-caps will outperform as domestic investors finally return to the market. Coupling a re-rating market multiple alongside an earnings upgrade cycle is the holy grail for investors — India could well be the surprise of 2014.
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