The hottest stock market in the world lately has been India’s.
As you can see, there’s been a gigantic rally over the last couple months, as it became clear that Narendri Modi would win the election and become the country’s new prime minister, something which was confirmed at the end of last week.
Why is the Modi story so exciting to investors?
The answer to that is captured nicely in a new report from Morgan Stanley’s Chetan Ahya titled: A Trigger For The Next India.
Basically, because Modi is very pro-growth and development, and because his party won in a gigantic landslide, India may finally have a government ready to institute badly needed political reforms that will reduce the deficit, corruption, bureaucracy, and inflation.
In Morgan Stanley’s terms, the result was a “political tsunami” with the key message being a strong mandate for economic development:
The elections also underpin the point we have made often over the past few months — Indian youth’s rising aspirations, desire for growth and development, and strong leadership are driving the political debate in the country. This increases the probability that the new government will focus on development and governance as its prime agenda. It sets the stage for India’s structural story to unfold in the coming years as we have highlighted in our recent note “The Next India”. We have assumed a greater chance of a reform agenda even though clarity on this will emerge in the ensuing weeks.
The key forecasts:
— Faster transition from stagflation to higher growth and slower inflation likely
–GDP growth to accelerate by 210bps over the next 8 quarters to 6.8%
— Inflation will finally head towards RBI’s comfort zone of 6% over the next two years
–In the initial phase, the recovery will be driven by improvement in productivity rather than by an increase in capital input
–We are even more confident of our medium term forecast that India’s GDP growth will average 6.75% over the next 10 years taking its GDP to US$5 trillion from the current US$1.9 trillion.
As for the current state of the Indian, there’s probably no better way to see the problems than this chart, which shows the number of investment projects that have been stalled.
When the global credit crisis hit in 2008, the number of stalled projects exploded. And it’s never gotten back to normal. While there’s been some improvement lately, you can see the massive bottleneck in getting anything done.
If the new government — with its outright majority — can get things moving again, the potential is significant.
And from a global story, there’s a simple reason to be excited about India. In the next 10 years, India is set to deliver a quarter of the world’s working age population growth. This is far higher than any other country.
India also lags significantly compared to other big, emerging markets in its pace of urbanization, another potential, pent-up growth driver.
So it’s not hard to see why investors are so excited.
The potential for structural growth in India is enormous due to demographic and other factors. But internally, reforms are badly needed. Now there’s a pro-growth government that has a huge political mandate.
The pieces are in place for a boom.
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