Indian Prime Minister Narendra Modi claimed a third term in office on Tuesday. Still, voters delivered a cautionary message as Modi’s margin of victory was much narrower than expected. Modi and his Bharatiya Janata Party colleagues will now refocus on economic growth in the world’s most populous democracy.
A big question follows: Is India replacing China as the world’s most rapidly growing large economy?
The short answer is yes and no. India is now growing faster than China, and under Modi’s policies, India will continue to rush toward middle-income status. In contrast, China’s economic dynamism is being sapped by demographics, real estate bubbles, misallocation of capital toward state-owned enterprises, and the suffocating effects of an authoritarian police state. Time matters, however.
For one, India’s economy remains 4 1/2 times smaller than that of China. China’s productivity is also nearly double that of India. While 45% of Indian workers are still in the highly unproductive agriculture sector, China has become a global manufacturing force for labor-intensive industries. Yet while leftists across the world will continue to hector about Modi’s authoritarian tendencies and his overt anti-Islam rhetoric, Modi and the Bharatiya Janata Party are not bent on creating a police state. Modi wants economic growth. He wants India to be considered a great country by other world leaders.
Ultimately, Modi will succeed in his efforts to transform his country into a global economic powerhouse. India, with its population of 1.44 trillion, is now the world’s fifth largest economy, trailing only the United States, China, Germany, and Japan. Under Modi, international investors who focus on the long term, years, not days and weeks, should enjoy handsome returns.
India’s stock market is booming. It has been whipsawed in recent days by the uncertainty regarding the just concluded parliamentary elections, up 3% at the beginning of the week and down 6% as the final votes were counted and the market realized that Modi and his Bharatiya Janata Party won only a narrow victory.
But investors should be confident. Modi is a populist authoritarian. He will claim a mandate for growth. Investing in individual stocks in an emerging market economy is difficult and risky. There are heightened risks involving financial transparency. The controversy regarding the balance sheet of the Adani Group illustrates that risk. That said, investing in an emerging market fund that focuses on India should deliver strong returns. Since 2000, the top 50 stocks of India, the so-called Nifty 50, have delivered compounded annual returns of about 11%. The “Nifty 50” index is up elevenfold from the year 2000.
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Two sector areas that might prove particularly attractive for investors are India’s largest banks and companies that provide goods and services to India’s rapidly growing middle class. The middle class of India includes almost 100 million consumers, a lot of Coca-Cola. That is an attractive target market for any company. In part, it explains why Apple is deploying more capital to India.
Top line: The public should cheer the election results in India. The country voted for free market capitalism.
Note: The writer has no financial interests in India.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society.