Opinion | How Modi’s ballot box stumble could benefit China

The question of the moment for global investors is whether Indian leader Narendra Modi can learn new tricks. His Bharatiya Janata Party (BJP) has suffered what has been described as a “humbling setback” in recent elections and there is talk of “Modi fatigue” that few political pundits saw coming.

Discerning the implications is the job of strategists advising investors on whether to bet on India or China. Modi’s stumble at the ballot box could work to China’s advantage.

Asian markets aren’t binary. But over the last few years, Mumbai stocks have been the clear beneficiary of the epic rout in the Shanghai and Shenzhen markets. From a 2021 peak to January this year, Chinese stocks have lost about US$7 trillion. That’s double the size of Britain’s economy and three times Italy’s.

The risk is that Modi fatigue might extend to a broader reassessment of perhaps the greatest capital boom in India’s history. The India macroeconomic story is still impressive. The economy is expected to grow by 6-7 per cent this year. But the case for Mumbai stocks relies more on the belief that “Modinomics” is revolutionising India’s competitive game.

Even before his recent chastening, Modi’s claims to global reform fame were more myth than reality. Under “Modi raj”, as The Economist calls it, India trimmed some bureaucracy, opened some sectors to increased foreign investment and pursued a broadly business-friendly approach. But the reforms most vital to levelling the playing fields – concerning land, labour, taxes and the legal system – remain on the to-do list.

The bet global punters made was that winning a third term in a landslide would catalyse Modi-the-reformer as never before. That’s now moot. A weakened mandate means the BJP has less political capital to enact difficult upgrades, particularly against newly emboldened vested interests. Modi’s biggest economic failing – inadequate job growth – has come back to haunt him.