It was with great fanfare that Narendra Modi was elected in May of 2014 as the Prime Minister of India. Since taking office, Modi’s administration has increased spending on infrastructure, reduced spending on health care and social welfare programs and has attempted to reform a fractured tax system.
Sound familiar? While India is a very different country than the U.S., their economy now seems to be stabilizing and is on a path to growth 3 years after their new PM with similar policy promises to Trump, was swept into office. Consumer confidence in India is at a high and a long talked about tax reform is due to take effect July 1st.
All of this has captured the attention of investors outside of India as foreign capital inflows into their stock market hit a record high in the month of March.
From the chart below, (using INDA etf) you can see how the country’s stock market fared during India’s recovery period. As you can see, there was an initial rally following the election of a pro-growth PM who promised change but unfortunately the economy was not strong enough to support this rally.
It wasn’t until two years after Modi’s election, that the markets first reversed its downtrend after Parliament passed their landmark Tax Reform bill. This was the first of many steps needed to pass the bill but it was cheered by investors.
India has been talking about tax reform for many years as their current fractured system has up to 17 levies that are imposed at every level of the production and delivery of goods. These taxes have not only raised the prices of goods and reduced their competitiveness for exports, the complex regulations and paperwork have long been a major hurdle for growth of India’s economy.
The “tax reform bill” rally was short lived as the reality of future steps being needed before the reform took place as well as the surprise devaluation of India’s currency brought the downtrend back.
More recently, the market has turned around with 4th quarter GDP being reported as a robust 7%. Consumer confidence is also at a near term high. And lastly, Indian Finance Minister Arun Jaitley claims that the implementation of the new tax reform will add 1-2% to GDP going forward.
While India’s stock market is in a strong uptrend, there are some economists who are doubting the strong GDP numbers that were reported as other manufacturing data are not supporting this number.
That said, it is interesting to see how a similar policy to the U.S. has played out in somewhere that is quite different.
Mary Ellen McGonagle
MEM Investment Research