In an unprecedented mandate, India re-elected NDA back to power with an overwhelming majority, with BJP on its own crossing the 272+ mark yet again, and bettering its tally of 2014.
As far as markets and economy are concerned, first and foremost, these results provide stability, decisive leadership and continuity in governance, reforms and policy agenda. Policy predictability will go up and ensure India continues to remain at the centre of global growth narrative. More importantly, this election result removes the key overhang of the markets i.e. fractured mandate and loss of momentum on structural reforms. The single-party majority will continue to facilitate decision making and structural reforms unlike in a coalition government where pulls and pressures of coalition arithmetic could have impeded the pace of policymaking.
We expect equity markets to take these results positively. Improvement in sentiment post the formation of stable government should augur well for foreign institutional flows as well as domestic mutual fund inflows which has seen consistent scale up in Systematic Investment Plan (SIP) based investments. Stable macros are also positive for currency and bond markets in a volatile global market context.
Fiscal consolidation
One of the key achievement of Modi 1.0 regime was getting control of inflation and fiscal consolidation. Prior to 2014, inflation and fiscal consolidation were key macro challenges in India. NDA implemented a host of structural economic reforms like GST, IBC, RERA, MPC, Demonetisation & DBT. Infrastructure creation received emphasis and road construction doubled during the five years. The Modi 1.0 regime will also be characterised by the comprehensive clean-up of the Banking system with excesses of the past being recognised and provided for. This should pave the way for the emergence of the new credit cycle, in my view.
We expect the larger economic reforms and social welfare agenda to continue with a renewed emphasis on Infrastructure Development. GST seems to have stabilised and monthly revenue run-rate is in ascendance. Banking asset quality clean-up is largely done and should herald a new credit cycle as capacity utilisation in the industry picks up. In Modi 2.0, we expect the economy and markets to have a relatively smoother trajectory sans the disruptive and transformational macro reforms. We also expect the government to continue to opt for higher cash transfers in a targeted manner.
From the near term perspective, the immediate focus of the government would be to revive the rural consumption engine, address the liquidity issues of NBFC /debt markets in coordination with RBI and drive fiscal spending to revive the industrial growth (IIP growth has moderated significantly in the last two months). Real interest rates in the economy continue to remain high despite inflation having been in control and within the target band of RBI. The next RBI policy in June and the first budget in July 2019 will be the key policy events to watch out for.
Modi 1.0 regime saw corporate earnings growing at a sub-optimal rate in the backdrop of structural and disruptive macro reforms. India’s Corporate Profit to GDP ratio has moderated from 5.5% in 2008 to 2.8% in 2018. However, now the Corporate earnings cycle seems to be bottoming out and with a revival in credit growth as well as asset quality of corporate banks, FY20 looks like the first year of healthy 15%+ earnings growth. I, however, do not see a room for significant re-rating for the markets, given the underlying fair valuations (19.5x FY20E Nifty EPS) and continued earnings downgrades.
I believe that this is a new beginning not only for the markets but for the whole country. India is on its way to be a super economic power.
(The writer is CMD, Motilal Oswal Financial Services)