In pushing India¡¯s stock market to an all-time high recently, investors seem to be drawing a smooth, straight line between a third term for Prime Minister Narendra Modi ¡ª their preferred and expected outcome of the just-completed general election ¡ª and soaring corporate profits. They might be ignoring an all-too-important speed bump: consumer debt.
A trifecta of slow wage growth, elevated interest rates and heavy borrowing by the average household has weakened the spending impulse of more than 300 million families that drives 70% of gross domestic product. Equity markets aren¡¯t too perturbed. Investors are betting on a post-election boom in private capital expenditure on the back of $534 billion in new infrastructure expected by Bloomberg Economics to come online by 2026, boosting India Inc.¡¯s competitiveness and lifting the economy¡¯s growth potential. More confident companies will also create better-paying jobs. Sooner or later, interest rates will start to decline, both at home and globally. Households¡¯ financial crunch will ease.
Bond investors¡¯ thinking is not too dissimilar: Unlike his opponents, the prime minister isn¡¯t promising a dramatic expansion of the welfare state. (According to him, he has already spent $400 billion on cash handouts and free food for the poor in the past 10 years.) Modi will instead borrow to expand productive capacity. A cautious fiscal stance and expectations of a stable currency make India¡¯s rupee-denominated government notes attractive. Borrowing dollars to buy Asian bonds has been unprofitable almost everywhere this year. India has been a notable exception.
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