What India's Election Means for the American Economy

A new prime minister has the chance to entice foreign investment.

May 22, 2014 at 11:36AM

Thousands of Indian citizens poured into the streets of New Delhi on Saturday to welcome Narendra Modi as he came to meet with the leaders of his political party, the Bharatiya Janata Party (BJP for short). The day before, the results of the world's biggest election had declared that Modi would be the next Prime Minister. BJP, for its part, swept into power with an unprecedented defeat of India's most storied political party, the Indian National Congress (often just called "Congress").

Modi and his Indian supporters weren't the only ones celebrating. Businessmen in parts of the world were also raising a toast to what promises to be India's most pro-business government in generations.

The Landslide

It's hard to understate the resounding defeat that Congress took at the hands of BJP in India's election. A historically dominant party, Congress has ruled India for 10 years. Though observers expected a defeat for Congress, they didn't forsee anything on this scale – Congress won a paltry 44 seats, a record low. BJP, meanwhile, romped to victory in a whopping 282 contests. Counting coalition allies, BJP now effectively controls 334 out of 543 seats in the lower house of India's parliament. That's a stunning majority, and a mandate for Prime Minister-elect Modi and the BJP.

The Economy

Observers call Modi and his party's election a victory for foreign investment in India. They base these statements not only on the platform of BJP, but on the conduct of Modi himself during the election. Modi shed a political past that was plagued by, among other things, questions about his governance of the state of Gujarat before and during a riot that claimed the lives of more than a thousand people.

In its place he built an image that focused on economics. He became the candidate of liberal economic policy, running largely on the fiscal side of his time in charge of Gujarat. His free market reforms, he said, were responsible for an economic boom in that region. His victory in the election, and that of his party, are now being heralded as the beginning of a economic boon in India. If true, this is sure to affect American companies as well.

The Winners

The general consensus seems to be that the election results are good for foreign investment in India. Money is pouring into India's stock market, and American companies are starting to take bigger steps into the nation.

Wal-Mart (NYSE:WMT) recently announced plans to open more than 50 new wholesale locations in India. The giant retailer is currently banned from entering the multi-brand retail business in India, a protectionist policy that predates the election. BJP's platform preserved this rule, but many observers suspect that Modi will allow it to be eliminated anyway. If true, that would make Wal-Mart one of the first American companies to benefit from his more liberal policies. Wal-Mart's expansion came before the election, during the period of optimism during which it became clear that Modi would win the election. Stockholders will no doubt be watching to see what they do next.

Other American giants are already firmly rooted in India. IBM (NYSE:IBM), for instance, has more than 100,000 employees there. The company owns a subsidiary called IBM India Private Limited, and CEO Virginia Rometty recently emphasized the importance of the country to her staff. Developing markets, including India, are expected to account for as much as 30% of IBM's revenue by next year.

India's role in the developing markets is also a big winner in this election cycle. Observers have compared India favorably to China – a country that stands to lose investment as more money pours into India. Of course, investment in developing economies is not necessarily a zero-sum game. What is clear is that India is riding high on a wave of enthusiasm and optimism – and so are many American firms and investors.

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