Authored article by Anirudha Taparia, Executive Director, IIFL Wealth
The outcome of the 2019 general elections marked the end of the first act for the BJP-led NDA. It is now time for the main performance, and the general expectation is that Modi government 2.0 will deliver another superb innings.
With this victory, the BJP government has created history by being the only non-Congress government to be elected to power for a consecutive second term. The decisive win has strong ramifications for the economy as well as the markets.
Promises to be kept
The market is looking at the second term of the Modi government to build on the foundation laid in the previous term. In last five years, the BJP government took myriad steps and introduced several ground-breaking reforms that have put the country on the path to faster growth and ensured financial inclusion. Much was done to improve India’s productivity and growth profile with the implementation of GST, insolvency law and JAM (Jan Dhan-Adhaar-Mobile) trinity, improving of the ease of doing business and opening up the economy for more FDI. However, many of the policies that have been implemented are yet to fructify.
While a large portion of the benefits from these reforms will increasingly play out in the years ahead, the government needs to further implement key productivity-boosting reforms, especially in land and labour markets. From that perspective, a continuity in government and policies is crucial to ensuring that India not only remains on its high growth trajectory but also potentially moves into a higher growth orbit.
A continuity in government implies continuity of policy, which bodes well for all stakeholders in the ecosystem. It indicates continued focus on execution of government projects as well as a thrust on further reform measures, which can augur well for investors making greenfield investments and nudge those sitting on the fence due to political uncertainty to finally take the leap. The government’s focus on reducing rural distress and RBI’s dovish stance on interest rates may fuel consumption in the economy.
Additionally, the process of cleaning up bank balance sheets is likely to continue and lead to a healthier financial intermediation with more appetite for credit. This will give a further boost to consumption and accelerate growth.
The decisive mandate is also good news for debt markets. In last five years, the NDA government has largely been fiscally prudent, and the election manifesto is comparatively less fiscally profligate. This means supply of government papers will not be larger than anticipated. It is expected that the credit side landscape of the debt market may improve as political certainty will accelerate more deal making in stressed companies and assets.
With the political stage now set, the market’s attention is likely to revert to growth cycle. We remain constructive on the outlook for the market, assuming that the growth cycle will indeed revive, leading to a more sustainable earnings cycle. Corporate India has spent much of the last few years recovering from the highs of the last cycle. We believe earnings are likely to pick up this financial year driven by a strong growth in corporate lending due to a drop in provisions.
We also expect an increase in foreign institutional investor (FII) inflow post the decisive mandate, which is likely to support the market at current levels. Our favoured valuation metric for a market that has undergone an extended earnings slowdown over the past several years remains price to book, basis which we are still in line with long-term averages.
However, liquidity concerns are a big challenge for the government currently and it needs to take measures on a priority basis to address these concerns. Additionally, the government needs to put job creation on top of its agenda since that will help kickstart the economy.
Tough policy actions and reforms taken during the last term will continue to deliver benefits and should be augmented by new initiatives, which can stimulate the economy going forward.
Domestic policy stability and an uncertain global environment should encourage foreign investors to positively reappraise their India positions following many years of reduced allocations, albeit in a more measured manner than we saw following the previous election. We are optimistic on India’s growth outlook and believe the country remains an attractive destination for the long-term investors.