Namo continues. With a renewed reinvigoration, the BJP government is in for a second term, riding on Narendra Modi’s brand equity. The Sensex is already flirting with 40,000 levels. Markets believe that the second innings will lead to renewed strength in pushing strong reforms and boost to domestic consumption. Reform dreams are abound, and not without a reason. For instance, the last innings witnessed two of the largest structural reforms — the demonetisation and the implementation of GST.
Reeling under consumption slowdown amid liquidity crisis in the NBFC sector and lower terms of trade in the agriculture sector, there are real economic worries. With limited fiscal space amid compelling priorities and electoral promises, Modi government’s second term in office is likely to be more challenging than the first.
Unlike the first five years, the solution to the problems is complex and will require a radical shift in the Indian economic policy.
There are 6 key areas where initiatives will likely be focussed on in the next 12 months. Will investors be able to profit from reforms/initiatives? Let us find out.
Farm incomes and farm prices remain low despite the Minimum Support Prices (MSP) increases. Farm income and rural economy are heavily inter-linked and more comprehensive efforts, reforms and implementation are required to improve sentiment.
As per the Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) announced in Interim Budget 2019, the government will provide direct income support at a rate of Rs 6,000 a year (in 3 equal instalments). Quick disbursement of money atleast before the key harvest month of July would provide added support to the rural economy. The BJP’s manifesto promises an expansion of this scheme to all farmers. This expansion faces fiscal constraints but should be prioritised by the government.
While a nation-wide farm loan waiver is unlikely, expect the crop insurance scheme and reform to get better market access to farmers (eNAM) as key focus areas.
While employment figures after 2011-12 are not there, the Centre for Monitoring Indian Economy's (CMIE) monthly unemployment rate estimates that unemployment in India was at a 29-month high of 7.35 per cent in April 2019. Post demonetisation and GST, the unorganised sector in the country has been reeling under pain, leading to weaker job creation.
If the country has to reap its demographic dividend, the massive skill shortage would have to be addressed on priority. This calls for a revamp of the Skill India Mission to make it more employment-oriented. Real estate and construction sectors must be revived to create jobs. Expect solid steps to be taken to increase manufacturing prowess, to create long term jobs supply.
There is a talk of the Reserve Bank of India (RBI) opening up a special borrowing window for the NBFC sector to help them tide over the liquidity crisis.
The Modi government must also ensure revival of PSU banks by prioritising recapitalisation. This can be done via a second tranche of recapitalisation bonds.
If there is some transfer of surplus reserves to the government, expect same to be prioritised towards recapitalisation of banks. The revival of the bank lending channels is critical as the liquidity crisis of the NBFC sector remains.
Rate cuts by the RBI amid liquidity infusion would aid the financial sector and support growth. Expect the MPC to cut the repo rate by an additional 50-75 bps. The June meeting is key in this regard.
Simplifying both the GST and the Direct Tax system by framing rules and regulations is critical. They make it easier for those who are and want to be compliant.
Also, India needs to attract long term capital from long term global investors. Creating a positive environment of stability and confidence will allow long-term investors to participate in a bigger manner in the India growth story.
What did the BJP manifesto tell us? It presented a roadmap to expand GDP to USD 5 trillion by 2025 through a step up in infrastructure investment (at 10 per cent of GDP from about 4 per cent now).
A lot of this depends on cutting down the cost of capital. It recognises that investment driven growth requires lower cost of capital. By anchoring inflation at 4 per cent and cleaning up the banking system, the BJP believes that it has created the space for structural reduction in the cost of capital.
Importantly, the Modi government has reiterated its commitment to fiscal prudence by not following the Congress’ universal basic income - NYAY - proposal of a steep 1.9 per cent of GDP even in the heat of the polls.
The Mandate 2019 has bolstered optimism for a stabler, more decisive leadership, and continuity in governance, reforms and policy agenda. Policy predictability will go up.
This is a great time to do privatisation of ailing government owned businesses like Air India and BSNL. A single-party majority can facilitate decision making and structural reforms, avoiding the pulls and pressures of coalition arithmetic.
However, the Modi government would be wary of pursuing slump sales of ailing PSUs to private companies at very low prices. Such moves can impair investor sentiment.
With politics behind us, investors should expect the market’s focus to revert to fundamentals and corporate earnings. The Modi 1.0 regime saw corporate earnings growing at a sub-optimal rate. India’s corporate profit to GDP ratio has moderated from 5.5 per cent in 2008 to 2.8 per cent in 2018.
In Modi 2.0 era, investors can expect the economy and markets to have a relatively smooth trajectory. If there is any disruptive and transformational macro reform, then things could change. So, be prepared for that risk.
As Modi 2.0 begins coincidentally now the corporate earnings cycle appears to be bottoming out. Yes, that is the consensus. There seem to be a revival in credit growth and asset quality of corporate banks. Investors should be hopeful of FY20 being the first year of healthy 15 per cent plus earnings growth. Do note that there is little room for significant re-rating for the markets, given the underlying fair valuations of about 20 times FY20 Nifty EPS.
The author is a financial journalist with more than 14 years of experience