Narendra Modi and the BJP Win Landslide Victory

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DELHI – The landslide victory for pro-business leader Narendra Modi and the Bharatiya Janata Party (BJP) in India’s national elections has left foreign investors optimistic about India’s economic prospects and triggered a record-breaking weekend for the country’s stock market.

The results of the longest election in India’s history were declared on May 16, just 15 days before the constitutional mandate of the 15th Lok Sabha was due to expire at the end of its five-year term.

The election was also the largest-ever in world history with an average election turnout of 66.38 percent of the country’s 814.5 million eligible voters.

The National Democratic Alliance, a coalition led by the BJP, won 336 of the 534 seats in the Lok Sabha (lower house of parliament), greatly surpassing the 272 seats needed to secure a majority government. The BJP itself won 282 seats, which marks the first time in 30 years a party has won enough seats to govern without needing to solicit a coalition with other parties.

In comparison, the outgoing ruling party – the Indian National Congress (INC) – whose tenure had been labelled the “worst Lok Sabha in India’s democratic history,” came to power with only 44 seats.

The election took place against a backdrop of difficult economic times for India as the country struggles with high inflation, a falling rupee and a drop in both industrial production and foreign investment. Some critics have blamed the adverse economic situation on the outgoing INC government for the party’s lack of focus on economic expansion, and have expressed hope that a new government may be able to revive the economy and reverse the current period of slowing growth.

The BJP campaigned on a platform of relaxing business restrictions and eliminating red tape, and has promised to set up a Price Stabilization Fund, simplify India’s tax regime, encourage labor-intensive manufacturing and upgrade the country’s infrastructure. The BJP has also pledged to foster the evolution of a single ‘National Agriculture Market’ in order to restrict price increases, focus on agriculture and improve self-employment opportunities in order to create more jobs.

The BJP has largely relied upon Modi’s reputation of being business-friendly and decisive in order to attract voters. The Indian state of Gujarat’s GDP quadrupled during his tenure as governor, a rate significantly higher than the national average. Modi also implemented successful irrigation projects and attracted investment from foreign companies including Reliance Industries Ltd. and Ford Motor Co. In the year ending March 31, 2012, Gujarat attracted 22 percent of India’s total planned foreign and domestic investment, which amounted to approximately 1.3 trillion rupees (US$22.27 billion).

Investors are also feeling optimistic due to the scale of the BJP’s victory. The majority won by the BJP’s National Democratic Alliance means that the Alliance will not need to rely upon the support of other parties in order to form a government. The BJP can therefore avoid both making the necessary compromises that would be involved in forming a coalition, and following the pattern of past Indian coalition governments of being unstable and indecisive.

Optimism about Modi’s pro-business reputation and the expectation of a majority win was reflected by key economic indicators last week prior to the release of election results.

The benchmark BSE Sensex index rose on May 16, opening more than 4.5 percent up before reaching a record high of 25,375.63 during the day, and finishing the day at a record closing high of 24,121.74. Deutsche Bank amended its December 2014 target for the BSE Sensex to 28,000.

The biggest gainers in the stock market were companies expected to do particularly well under economic reform. Rakesh Arora, of Macquarie Capital Securities India Pvt Ltd., advised buying shares in the State Bank of India, whereas CLSA Asia-Pacific Markets suggested Jaiprakash Associates Ltd., which builds highways and power plants.

The election results also had positive ramifications for the rupee, which rose to an 11-month high of 58.62 against the U.S. dollar and later closed at 58.79.

This follows the news reported last month that international companies are intending to step up investment following the constitution of the new government.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

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