Narendra Modi’s Bharatiya Janata Party (BJP), which has held a commanding presence in the Indian parliament, has lost its outright majority. This political shake-up triggered immediate turbulence in the financial markets.
The shock outcome means that the Indian prime minister will have to rely on smaller allies to form a coalition – a significant shift from the previous two elections, in which the BJP secured absolute majorities on its own.
Mumbai’s share prices plummeted, with the Nifty 50 index closing 6% down after soaring to record highs the previous day, buoyed by exit polls that had erroneously predicted a comfortable victory for Modi and his party – which would have meant “the status quo,” or certainty, which markets appreciate.
Such volatility may seem to suggest a diminishing confidence in India’s economic stability and growth prospects.
However, this perspective underestimates the robust underlying factors that continue to make India an attractive destination for global investors.
Despite the political uncertainties, the economic fundamentals remain strong.
The country boasts a large and growing consumer market, driven by a burgeoning middle class and increasing urbanization. India’s demographic advantage, with a young and dynamic workforce, underpins its potential for sustained economic growth.
This demographic dividend is a crucial factor for global investors looking for long-term returns, as it promises a continuous supply of labor and an expanding consumer base.
New Delhi has also been busy implementing significant economic reforms aimed at improving the business environment. Initiatives such as the goods and services tax have streamlined taxation, making it easier for businesses to operate across the country.
The government’s moves towards digitalization and improvements in infrastructure have also enhanced India’s appeal as an investment destination. Startup India, for instance, aims to build a strong ecosystem for nurturing innovation and startups.
Foreign direct investment liberalization has also significantly improved across sectors that include defense, railways, aviation and retail, making entry and operation in the Indian market more attractive for global investors.
Another pivotal initiative is the production-linked incentive (PLI) scheme, launched in 2020, which provides financial incentives to companies for boosting domestic manufacturing and attracting large investments in key sectors like electronics, pharmaceuticals and textiles. By linking incentives to production output, the scheme enhances manufacturing capabilities and attracts foreign investment.
These policies are all likely to continue regardless of the political composition of the parliament, as there’s a broad consensus on the need for economic modernization and development.
India’s appeal is further bolstered by specific sectors that offer substantial opportunities for investment.
The tech and startup ecosystem in India is one of the fastest-growing in the world, with cities like Bangalore and Hyderabad emerging as global tech hubs that are attracting substantial foreign direct investments from tech giants like Google and Facebook.
The country is home to a vibrant startup culture, supported by a robust network of incubators, accelerators and venture capital funding. This innovation-driven environment attracts global investors who seek high-growth opportunities.
Additionally, the renewable energy sector in India presents significant investment potential, with the government’s ambitious targets for green energy capacity.
We also expect that India will continue to increasingly position itself as a formidable competitor to China in attracting international investors.
The Make in India initiative has been pivotal in creating a manufacturing ecosystem that rivals its nearest major competitor, especially as geopolitical tensions between the US and China have prompted many companies to consider India as an alternative hub for manufacturing and services.
I’m confident that the temporary market volatility caused by the shock election results will not overshadow the underlying strengths that appear to promise sustained growth and attractive returns for global investors.
Indeed, the appeal is likely to significantly increase throughout 2024 due to the simmering trade tensions between the US and China.
Nigel Green is CEO and founder of deVere Group.