Economic growth is challenging for India
The Indian market was up in May. Carnegie Indienfond rose 1.0 %, giving it a gain of 12.6 % year to date.
Asian markets were sold off this month, following strong springtime performance. A breakdown in trade talks between the US and China naturally caused concerns to spread, but the Indian stock market countered the flow and rose. The Indian economy is driven mainly by domestic consumption and is not as dependent on exports to the US. However, it was the result of the national election that encouraged investors to take renewed confidence.
Narendra Modi and his BJP party took election victory, considerably strengthening their position and winning 350 parliamentary seats together with coalition partners, a clear majority and a stronger position than the 330 previously. Contrary to portrayals in Western media, Modi’s popularity is not much based on BJP efforts to strengthen Hindu culture. On the contrary, he wants to be a leader of the entire people and his strength is also his simple background and low caste. Compared to the Congress Party and the Gandhi family, who long governed India, Modi’s profile is much less elevated; ordinary people are tired of being governed by political elites, and widespread corruption previously generated great dissatisfaction with the Gandhi clan’s power.
The biggest challenge going forward will be to accelerate economic growth. GDP grew by only 5.8% in the fourth quarter, and consumption is showing worrying fragility. The central bank is expected to cut interest rates by 0.5% this June. The new budget in early July is predicted to include cash payments to farmers, new government investment in infrastructure and targeted tax cuts. The VAT reform has finally provided increased tax revenues that can be used for other measures.
The stock market may be driven in the short term by positive flows, not least from local equity funds that have been cautious ahead of the elections and have high cash reserves. In the slightly longer term, there will need to be support from better profit growth in order to justify the valuation.